VA loans are mortgages for veterans that served their time in the military and are now rewarded with 100% financing. VA loans have flexible underwriting guidelines and favorable interest rates. They also have a few restrictions that you must meet, including living in the property as your primary residence. However, what happens when you want to buy a home in disrepair? Does the VA allow you to finance home improvements?
Technically, ‘yes,’ the VA does allow it. Where you’ll run into trouble though is finding a lender that will do it. Many lenders do not want to take the risk. They are already giving you 100% financing, which means you have no skin in the game. You don’t invest your own money. Now if the lender lends you even more money than the purchase price, you could be in over your head. This could leave the lender with your home and an unpaid mortgage. While the VA does guarantee 25% of the loan, that’s often not enough to keep a lender out of hot water.
So what are your options if you use VA financing?
Finding a Willing Lender
First, you can do the legwork and try to find a willing lender. Whether you will or not depends on your circumstances and how hard you look. Most lenders don’t want to deal with the repairs as they take away from the home’s value. If you default on the loan, you leave the lender with a beat up home and a large outstanding mortgage balance.
This doesn’t mean there are not lenders out there. If you really want to buy a home that needs work, you’ll have to inquire with many VA lenders to find the answers you need.
A VA Cash-Out Refinance
One easier way to fix up a home is by refinancing the VA loan you already have. Of course, this only works if the home you buy is in decent enough condition that it passes the VA appraisal. If you want to buy a home that needs some fixing up in order to be safe, sanitary, and sound, the VA loan won’t help your case.
If you already own it, though, the VA does offer the cash-out option. With the cash-out loan, you are free to do with the money as you want. In other words, neither the lender nor the VA monitor what you do with the funds. This leaves you free to make home improvements if you wish.
The VA cash-out refinance offers up to 100% of the home’s value. For example, if your home is worth $300,000 and you have $200,000 outstanding, you can borrow an additional $100,000 with the cash-out loan. Of course, if you borrowed 100% of the home’s purchase price when you bought the home, it will take some time to get the principal knocked down to a point that you have enough equity worth taking out of the home.
The VA cash-out refinance will cost you in closing costs as well as the funding fee, which is still 2.15% of the loan amount. You’ll need to figure that into your calculations when determining if this is the right route to take when making home improvements.
Know that VA loans aren’t your only option. The VA purchase loan is a great benefit, but if you need money to fix up your home, you can use one of the following:
- Home equity loan – Taking out a second mortgage doesn’t affect your primary VA loan. You can tap into the equity you have established in the home, doing with the funds as you see fit. Home equity loans are not governed by a specific entity. You can shop with five different lenders and get five different requirements from them. Shop around until you find a lender that meets your needs.
- FHA 203K loan – The FHA 203K loan is a rehab loan. While it’s not the VA loan with 100% financing capabilities, it still offers you some decent benefits. You will need to put down 3.5% of the purchase price, but you can borrow up to 110% of the improved value of the home before you even own it. The FHA loan does require upfront mortgage insurance and annual mortgage insurance, though, so keep that in mind when determining if you can afford the payment.
Making home improvements on a home you buy with your VA benefits is possible; you just have to think outside of the box. If you are lucky enough to find a willing lender to give you a VA rehab loan, you are in good shape. If not, you have other options at your disposal, you just have to figure out which one works the best for you.