May 16, 2021

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A VA Renovation Mortgage to Fund a Fixer-Upper: Is It Right for You?

You are a service member or a veteran looking to buy a home. But you are on a tight budget and you will likely need to buy a diamond property in the rough that you can rehabilitate. Where can you turn for funding?

The Department of Veterans Affairs (VA) has a home renovation loan that finances the purchase price of a home and the cost of repairs into a fully amortizing fixed rate mortgage. You don’t need to do two separate financings – one for the mortgage and one for the renovation.

Or say you already own a home that needs significant upgrades. Instead of buying a home equity loan, line of home equity (HELOC), or traditional payout refi, you can opt for a VA Reno loan and use it to refinance your property and pay for improvements.

It offers all the benefits of a conventional VA loan, such as: B. No down payment, lower minimum credit values ​​and no mortgage insurance required. Withdrawal refinancing and home equity loans are usually subject to stricter standards.

“The VA Home Home Loan is an incredibly useful resource for any borrower qualifying and trying to upgrade and customize their next purchase or remodel their existing property,” said Richie Duncan, senior loan officer at VA Nationwide Home Loans (VANationwide.com ). , a VA home renovation loan provider based in Overland Park, Kansas.

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Of course, rules and restrictions apply. Although guidelines vary from lender to lender, you typically need to meet the following criteria to be eligible for this loan vehicle:

  • Be a service member or veteran who served at least 90 consecutive days of active service, 181 days of peacetime service, or six years of service in the National Guard during the war, or married to a service member who died in the National Guard roster or due to a service-related disability .
  • Get a valid one Certificate of attendance.
  • Use the house as your primary residence. The home cannot be an apartment building or mixed-use property, condominium, demolished / elevated / relocated home, cooperative, investment property, or mobile home on rented property. Existing built houses, foreclosures and short sale houses are eligible.
  • Do not exceed the maximum renovation cost of $ 100,000.
  • Choose a repayment period of 10, 15, 20, 25 or 30 years.
  • Have a minimum credit value, usually between 580 and 620 or more.
  • A loan-to-value ratio of 90% (of the estimated value) must not be exceeded if it is a refinancing loan.
  • In most cases a debt-to-income ratio of 50% cannot be exceeded.
  • Assign a general contractor / subcontractor to carry out the work. (Borrowers cannot do the renovation themselves.)
  • Start work within 30 days and complete all work within 120 days of loan closing.
  • Apply the funds for renovations that are not structural or are considered luxury items. Eligible improvements include those that eliminate health and safety risks. Connection to public water and sewage systems; Repair or replacement of plumbing, HVAC and / or electrical systems; Make changes to improve functionality and modernization; Replacing a worn roof; Improve energy saving; and improving accessibility for people with disabilities.

“If you need to make significant structural improvements, e.g. B. Changing support beams, doing foundation work, building an addition and moving walls that require new load-bearing beams are not eligible for this loan, ”said Duncan.

“You can’t borrow more than the total cost of all your repairs,” said Eric Nerhood, owner of Premier Property Buyers, a Seal Beach, California-based real estate flipping and investment firm. “You may only use contract partners approved by VA. You must have a demonstrable income with tolerable debt. And you can’t buy a house, take it down and renovate it from scratch. “

This loan is ideal for qualified homeowners who have not built up enough equity.

“Anyone who hasn’t accumulated enough equity in their existing home, but for whom updates make a big difference, should definitely consider doing this – especially if you’ve found home values ​​in your area are rising rapidly and you want to keep up and take advantage of the potential for substantial equity gains, ”said Duncan.

Be warned, however: it won’t be easy to find a lender that offers a VA home renovation loan, Duncan said.

“These are very complicated loans. They require more documentation, multiple conversations, contractor approval, and compliance with all deadlines, ”said Duncan. “Also, in hotter markets, it can be more difficult to convince a seller that you can get this loan.”

If you are not eligible for a VA home renovation loan or if you would like to do your due diligence as a borrower, you can look for alternatives like FHA 203 (k) loan, VA Disbursement Refinancing Loans, VA Energy Efficient Mortgage, Fannie Mae HomeStyle Home Improvement Loan, a HELOC or a Home equity loan. Each of these options has their pros and cons, but some might have more limitations and cost more in the form of higher interest rates, down payment, and closing costs.

– Erik J. Martin is a writer for Three Creeks Media

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