Home improvements like kitchen remodels can cost tens of thousands of dollars. If you don’t have that sort of cash sitting around, you’ll need to finance the work. Fortunately, the Department of Veterans Affairs offers a loan for these sorts of improvements: the VA supplemental loan. We’ll use this article to provide an overview of this loan product.
Specifically, we’ll discuss the following:
- VA Supplemental Loan Overview
- How to Apply for a VA Supplemental Loan
- Final Thoughts
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VA Supplemental Loan Overview
According to the VA’s lender handbook, a supplemental loan is: a loan for the alteration, improvement, or repair of a residential property. That is, if you need to do some work on your home, you may be able to use a VA supplemental loan to finance the costs.
For example, say you need to repair your roof. These repairs can cost tens of thousands of dollars. Most homeowners do not have this sort of cash available, meaning they need to use a loan to finance the work. If eligible, the VA supplemental loan can be a long-term, low-interest option.
VA Supplemental Loan Requirements
However, these loans have fairly strict requirements. In particular, the property you plan on improving must:
- Secure an existing VA-guaranteed loan, and
- Be owned and occupied by the veteran, or the veteran will reoccupy upon completion of major alterations, repairs, or improvements.
In other words, if you don’t already have a VA loan on your property, you cannot use the supplemental loan. So, if you A) paid off your VA loan, or B) used a conventional mortgage to purchase your home, you won’t qualify for a supplemental loan. And, as with all VA loan products, this one requires that you personally occupy the home as your primary residence. Even if you have a VA loan securing an investment property, that property won’t qualify for a supplemental loan.
Additionally, the alterations, improvements, or repairs completed with the VA supplemental loan must:
- Be for the purpose of substantially protecting or improving the basic livability or utility of the property, and
- Be restricted primarily to the maintenance, replacement, improvement or acquisition of real property, including fixtures.
The supplemental loans must be used for habitability-related items – not recreation. The VA’s lender handbook explicitly states that: installation of features such as barbecue pits, swimming pools, etc., does not meet this requirement.
Lastly, borrowers cannot use more than 30% of the supplemental loan proceeds for: the maintenance, replacement, improvement, repair, or acquisition of nonfixtures or quasi-fixtures such as refrigeration, cooking, washing, and heating equipment. The equipment must be related to or supplement the principal alteration for which the loan is proposed. For example, you couldn’t secure a $15,000 supplemental loan for a kitchen remodel and use $10,000 of that loan to purchase a high-end refrigerator.
Maximum Loan Terms
You can structure these loans in one of two ways: amortizing or non-amortizing. And, how you structure your VA supplemental loan will dictate the maximum terms, that is, length of the loan:
- Amortizing loan: These loans include the regular payment of principal and interest (like a normal mortgage). Borrowers can secure an amortizing VA supplemental loan with a maximum term of 30 years.
- Non-amortizing loan: These loans only include interest payments, with borrowers making a lump sum payment at the end of the term. Borrowers using a non-amortizing VA supplemental loan can have a maximum loan term of five years.
Other Considerations
The supplemental loan also imposes requirements relative to your associated VA home loan. According to VA guidance: the existing loan must be current with respect to taxes, insurance, and amortized payments, and must not otherwise be in default unless a primary purpose of the supplemental loan is to improve the ability of the borrower to maintain the loan obligation.
How to Apply for a VA Supplemental Loan
The Department of Veterans Affairs offers three options to apply for a VA supplemental loan:
- Option 1, Increase Existing Balance: If you apply for a VA supplemental loan with the lender that holds your current VA loan, you can request that the lender roll the supplemental loan balance into your existing VA loan.
- Option 2, New Mortgage: You can also take out a completely new loan to pay off the existing VA loan and roll the construction costs associated with the work into that new loan.
- Option 3, Separate Loan: Lastly, you can take out a completely separate VA supplemental loan, leaving your existing VA loan in place.
Also, it’s important to note that most VA supplemental loans require a home appraisal. However, if you borrow less than $3,500 for work on your home, you do not need an appraisal.
Interest Rate Considerations
Considering the above loan options, the VA imposes strict interest rate criteria. First, the making of a supplemental loan can never result in any increase in the rate of interest on the existing loan. That is, if you roll your supplemental loan into your existing VA loan, the lender cannot use that as an excuse to raise the interest rate on the entire loan.
Second, and related to this requirement, the VA states that: a supplemental loan to be written at a higher rate of interest than that payable on the existing loan must be evidenced by a separate note from the existing loan. In other words, if a lender does only offer you a higher interest rate on your supplemental loan, the new loan must be separate from the existing mortgage. This means that, while you may pay a higher interest rate on your VA supplemental loan, it won’t affect the interest on your mortgage.
Final Thoughts
If you have a VA loan on your current home and need to do some major work on that home, the VA supplemental loan can be a great option. The Department of Veterans Affairs imposes strict eligibility criteria. But, if eligible, the supplemental loan can let you finance repairs, improvements, or alterations over a 30-year period.
If interested in securing one of these loans, talk to a VA-approved lender.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.
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