VA Renovation & Rehab LoansUpdated: November 7, 2022
Department of Veterans Affairs rehabilitation and renovation loans include all the benefits of a traditional VA loan, including 0%-down payments, lower closing costs, plus the ability to roll renovation and rehab costs into the same loan. Qualifying military members, veterans, and certain military spouses who are eligible to apply for a VA home loan often want to know what their options are for renovation and/or rehab loans for the property they bought (or are considering) with a VA mortgage.
It can be a bit tricky to track down information about VA-guaranteed rehab or renovation loans; the VA Lender’s Handbook (VA Pamphlet 26-7) has very few pages dedicated to these types of loans, but they are available from participating VA lenders who choose to offer them.
The loans we’re examining here do not fall under a single “VA loan umbrella.” Some of these loans are available as “stand-alone” transactions, others may require you to apply at the same time you apply for a new purchase loan or refinance loan.
Ask your lender what is required of each of the different types of loan discussed here.
VA Renovation and VA Rehab Loans: Not To Be Confused With Other VA Programs
To start, VA renovation and rehab loans, in general, should not be confused with other VA programs, such as the Specially Adapted Housing Grant, which is intended to provide grant funds to those with qualifying VA-rated disabilities to help adapt or purchase an adaptable home.
These grant funds are not VA loans and generally, have no expectation of repayment.
VA Rehab Loans and Renovation loans are actual mortgage loan type transactions that have an application, credit check, appraisals where required, a mortgage term and a monthly mortgage payment.
VA Rehab and Renovation loan options may vary depending on the lender, the housing market and other factors. The basic availability of this type of transaction as a VA-guaranteed mortgage loan depends on the willingness of the participating lender to offer the loan.
VA Renovation Loans and VA Rehab Loans For Alteration and Repair
VA Pamphlet 26-7 has a short section dedicated to VA mortgage loans “for alteration and repair.” The loan rules state that a participating lender can offer a VA-guaranteed loan for work to be done on a home already owned by the borrower (and occupied as the veteran’s principal residence).
These loans can also be issued at the same time as a VA loan is made to purchase a home.
In both cases, “The alterations and repairs must be those ordinarily found on similar properties of comparable value in the community.”
This portion of the VA loan rulebook leaves it up to the lender’s discretion to interpret what that means in a particular housing market.
Borrowers should also know the next rule in this section, which instructs the lender that the expense of the repair or renovation work, “may be included in a loan for the purchase of improved property to the extent that their value supports the loan amount.”
VA Supplemental Loans For Repair, Renovation
There is a different section of the VA Lender’s Handbook that discusses VA loan rules for supplemental loans, which can be used to make repairs or alterations. Some lenders may not have any experience with VA supplemental loans, so you may need to direct the lender to Chapter Seven, Page 23 of the VA Lender’s Handbook to learn more. What is a VA supplemental loan? According to the Handbook:
A supplemental loan is a loan for the alteration, improvement, or repair of a residential property.
Requirements for these VA loans include, but are not limited to, the following rules for the property to be renovated:
- The property must secure an existing VA-guaranteed loan.
- Must be owner-occupied or preoccupied by the veteran once the work is complete.
- The renovation or alteration work must be intended to protect or improve the basic use and/or liveability of the property.
- The work must be “restricted primarily to the maintenance, replacement, improvement or acquisition of real property, including fixtures.”
- No luxury items, such as the installation of swimming pools or barbecue pits.
Other Restrictions On VA Supplemental Loans
VA loan rules restrict certain uses of the loan funds. “No more than 30% of the loan proceeds may be used for the maintenance, replacement, improvement, repair, or acquisition of non-fixtures or quasi-fixtures, such as refrigeration, cooking, washing, and heating equipment.”
When the equipment is purchased, it must be somehow related to (or is required to supplement) the “principal alteration for which the loan is proposed.”
VA Supplemental Loans: For Current and Delinquent VA Mortgages?
VA supplemental loan rules require the borrower’s current VA mortgage to be current, including on all taxes and insurance. Loans in default cannot be approved for a VA supplemental loan, unless “a primary purpose of the supplemental loan is to improve the ability of the borrower to maintain the loan obligation.”
Is A New Appraisal Required For VA Supplemental Loans?
Appraisal issues for VA supplemental loans depend greatly on the amount of the loan. Any project with costs below $3,500 do not require a new appraisal or compliance inspections. A “statement of reasonable value” may be submitted instead of a new appraisal.
If an appraisal is required, the appraiser must note whether the project’s costs exceed the proposed value or not.
VA Supplemental Loans and VA Loan Entitlement
For VA supplemental loans, the borrower may be required to carry sufficient VA loan entitlement for the new loan. However, VA Pamphlet 26-7 does make a provision for certain situations where the entitlement may not be needed:
“If the veteran has no available entitlement, VA can still guarantee the supplemental loan provided the lender is the holder of the veteran’s existing loan and the loans are to be consolidated.”
VA Energy Efficient Mortgages
VA Energy Efficient Mortgages, also known as VA EEM for short, are an add-on to a VA new purchase mortgage or refinance loan allowing extra funds for approved energy-efficient upgrades. These upgrades require the participation and approval of the lender and may be permitted in certain dollar amount increments depending on the nature of the project.
VA Energy Efficient Mortgage Loan Ranges
Energy-efficiency improvements are allowed in the following ranges:
- Improvements/upgrade projects costing up to $3,000
- Projects between $3,000 and $6,000
- Projects costing more than $6,000
Your VA lender is required to make sure that the extra loan funds do not make the increased mortgage payments unnecessary compared to the savings over time on the utility bills.
From the VA Lender’s Handbook, we learn that the increase in monthly mortgage payments must not exceed “the likely reduction in monthly utility costs.” The lender is required to pull data from “locally available information provided by utility companies, municipalities, state agencies or other reliable sources”.
VA Energy Efficient Mortgages are not quite the same as other renovation/rehab loans discussed here; this add-on to your VA home loan may require hiring an energy consultant and other steps to satisfy VA home loan requirements.
You cannot use the funds from a VA energy-efficient mortgage to make nonenergy-efficient changes to the home, but borrowers are permitted to consider solar power, new storm windows and/or doors, and approved “smart home” devices with a demonstrable energy-efficient purpose.
Availability of VA Energy-Efficient Mortgages
You may apply for a VA EEM with nearly any type of VA mortgage loan including refinance loans. Ask your loan officer about the VA EEM option and how much you may qualify for.
Lender Standards For Borrowers Doing Own Work
Some VA loans may technically allow the borrower to do his or her own contracting, repair, or renovation work. However, lender requirements will also apply, and you should not assume the lender will permit you to act as your own contractor or builder, even if you have credentials and experience doing so.
State law, lender requirements and other variables will apply in addition to VA loan rules.