Most veterans know they can use VA home loan benefits to buy a house, but did you know VA mortgage loans can be used to improve a home too? It’s not a common use, but the benefit is there for those veterans that qualify.
The VA allows veterans to use its home improvement loan in one of two ways. Veterans can buy a house that needs repairs using VA financing. They can also refinance an existing VA loan with the VA cash-out refinance. Both options provide veterans with the funds needed to fix up a home so that it meets the VA Minimum Property Requirements.
The Basic Requirements
First, you must qualify for VA financing. This starts with entitlement. Do you meet the service requirements? Did you:
- Serve at least 90 days during wartime
- Serve at least 181 days during peacetime
- Serve at least 6 years in the National Guard or Reserves
If you answered ‘yes’ to one of the above requirements, you are likely eligible. The VA also requires an honorable discharge in order to get full entitlement. This allows you to borrow up to $484,350 with your VA loan.
- In addition to entitlement, you must meet the basic VA loan guidelines:
- Minimum credit score of 620 (this varies by lender)
- Maximum total debt ratio of 43%
- Stable employment/income
- Proof of funds to cover the closing costs
The Housing Requirements
Your loan approval depends on the house as well. Typically, the VA has Minimum Property Requirements. The MPRs ensure the house is safe, sanitary, and structurally sound. The appraiser’s job is to ensure the house meets these requirements. The appraiser looks at the heating and cooling system, water supply, sewage, street access to the home, condition of the roof, and condition of the home’s structure.
If you buy a house that doesn’t meet these requirements, a home improvement loan is the only way to get financing. Buying a home that doesn’t pass the MPRs without money to fix it up won’t pass the VA guidelines.
How Much Can you Borrow?
Now comes the question of how much you can borrow to fix up a home. If you are buying the home, the lender must determine the Notice of Value. The VA appraiser provides this value, which is based on the following:
Contract price for the home + cost of required repairs + cost of contingency reserve + inspection fees + title fees = NOV
You can borrow up to 100% of the allowed loan amount, as you could with a standard VA purchase loan. The VA doesn’t require a down payment.
Lenders need the home improvement plans to underwrite a VA home improvement loan. The lender needs the plans as well as information on the chosen contractor for the job. Lenders must approve not only the improvements you make but also the contractor you hire.
The lender must approve the home improvement contract and come up with a disbursement schedule. The contractor must agree to this schedule as it determines how much and when the contractor receives payment.
Using a VA Loan to Improve an Existing Home
The VA does allow you to use the VA cash-out refinance to improve your existing home, but not in the same way as a standard home improvement loan. In other words, if you decide you want to add a luxurious deck or pool in the backyard, the VA loan won’t be an option. But, if you need to make improvements to the house to improve its livability, the VA cash-out refinance may be an option. Typically, the following repairs fall under this category:
- Roofing repairs
- Repairing floors and carpets
- Repairing any major mechanical system
- Replacing lead paint
- Fixing the foundation
- Making the home energy efficient
The VA allows 100% financing even on a cash-out refinance. The VA appraiser determines the after-repair value of the home to determine your loan amount.
VA loans do offer the opportunity to make home improvements, but only in certain situations. Talk with a VA lender to determine if the improvements you plan to make fall under the VA guidelines. Keep in mind that any repairs must be necessary in order to bring the home up to VA code in order to qualify.