VA Renovation Loan

VA Renovation Loan Program Information

You may already know about the benefits of VA loans compared to other loan programs. You’ve heard about the relaxed credit requirements and lower interest rates. But the biggest benefit of VA loans is the ability to finance 100% of the price of your home. That means no down payment, and no PMI (Private Mortgage Insurance) to worry about. Not having to worry about a down payment means you can use your VA loan benefits right away instead of waiting 5 years to save up a 20% down payment for a new home. Plus, with no private mortgage insurance (PMI), you can buy more house! To put that into real numbers, a conventional mortgage of $250,000 with a 5% down payment results in a PMI payment of $150/month over 30 years. That means that with a VA loan, you are able get $30,000 more house in most cases than you can with a conventional mortgage.

OK, we all agree that’s great. But you’ve been looking around, and see nothing available that suits your needs in your price range. A few older houses had potential, but they need work to make them into a comfortable new home. You don’t have much cash available upfront. Well, that is where VA renovation loans in.

The History of VA Renovation Loans

Several years ago, the Veterans Benefits Administration began receiving lots of questions about renovation loans and inquiries about loan options geared toward alterations and repairs. The houses in the United States are not getting any younger, and older houses still outnumber the amount of new construction on the market today. In most cases these older homes are often in need of a facelift. In the past the traditional VA loan would not cover these improvements and many borrowers would have to get a supplemental loan to do these types of home improvements. Luckily in 2018 the VA rehab loan was born. The VA renovation loan addressed many of these problems that homeowners were having.

Benefits of VA Renovation Loans

So how do these VA loans help you? The high-level answer is that with a VA renovation loan (Also known as the VA Rehabilitation Loan, or a VA Rehab Loan), you are able to borrow not only the price of the home but also extra money for any improvements, repairs or alterations needed to improve the house and make it livable. And the best part? It’s still only a single mortgage, so you only have to deal with one VA loan payment. It incorporates the improvements right into the value of the home. Work is then able to start after you close on the loan. This is a fantastic option if you want to use your VA earned benefit to purchase or refinance a home that needs a little TLC.

It’s important to note that renovation loans are not used to remodel your entire home or to make major renovations. The purpose of this benefit is to ensure your new home meets the standard for VA financing. You can find these standards listed in detail as part of VA Pamphlet 26-7, Chapter 12. In short, the house must meet all current building codes, Federal regulations and HUD requirements. So, it can not be used to put in a swimming pools, an outdoor Jacuzzi, or even something major such as a septic system. But you can repair that leaky roof, replace worn floors, fix a cracked foundation or install energy-efficient upgrades.

VA Renovation Loan Guidelines

The VA renovation loan guidelines are a little more involved than a straight VA Home Loan. Initially, you are applying for two loans – the original purchase loan and the renovation loan. The two loans are then rolled together into one monthly payment. Any alterations and repairs covered by the renovation loan are included in the final value. This is the as-completed value. Repairs can take place after the closing of the loan! The lender pays loan monies to the contractor as they complete the alterations. We’ll learn more about this in a bit.

You may be wondering how the lender comes up with the total amount needed to buy the home and complete the renovations. They use the lessor of the acquisition cost versus the as-completed value determined by a VA fee panel appraiser. This is called the Notice of Value, or NOV. The appraiser determines the acquisition cost by adding up the contract sales price, total cost of alterations and repairs, inspection fees, title update fees, and permits.

What is are these reserves? The funds are a cushion for any just-in-case situation that may arise. Everyone knows, once a contractor starts to dig into a project, they find things that may cost more money or extend the length of time needed for repairs. The maximum contingency allowed is 15% of the project cost. While it’s not required, the lender will decide if a contingency is warranted based on the scope of work to be performed. Any money left in the contingency when the work is completed must be applied to the principal balance. If you paid the contingency out of pocket at the closing, the money will come to you once the project is complete.

That was a lot of information, so let’s put this into real numbers so you get the idea. You can find the following example in Circular 26-18-6, published in April of 2018.

VA Rehab Loan Scenario A

Contract sales price is $100,000, alterations and repairs $75,000, incident reserve (10%) of $7,500, inspection $250, permit $250 gives you a total acquisition cost of $183,000. The Notice of Value is reported at $180,000. Because the $180,000 is less than $183,000, that is considered the acquisition cost. Therefore, you would be required to bring the additional $3,000 to the closing. This is not considered a down payment because the acquisition cost is greater than the reported market value of the house.

VA Rehab Loan Scenario B

Contract sales price is $100,000, alterations and repairs $75,000, incident reserve (10%) of $7,500, inspection $250, permit $250 gives you a total acquisition cost of $183,000. The Notice of Value is reported at $190,000. The lesser amount of $183,000 is used as the acquisition cost, allowing the entire amount to be financed, along with the funding fee.

As you can see, the bottom line is that the as-completed cost will need to be lower than the Notice of Value in order to be fully financed. Anything over the NOV will require out of pocket funds at the time of closing.

Refinancing With VA Rehab Loans

What if you already own your home and want a refinance loan option for an existing mortgage? The scenarios are the same to finance home improvements. The only difference is you need to completely pay off your current mortgage by refinancing the existing loan. To figure out the acquisition cost for a refinance, you simply add the existing loan payoff, total cost of repairs and alterations, inspection fees, title update fees and permits. If the total is above the Notice of Value, you would either have to pay the extra out of pocket or reduce the project costs. If the total is below the Notice of Value, you have the additional bonus of being able to roll in closing costs or use your home equity and take a cash-out up to 100 per cent of the loan value.

Home Purchase Option

• A great option to improve foreclosures or short sale

• Improve outdated homes

• New VA Home purchase that is in need of some repairs.

Home Refinance Option

•Improve an existing home rather than move to a new property.

•Renovation on a VA home in need of a little TLC.

Ok, you have your financing, you have your loan – now what? You start your project! The part of the loan earmarked for renovation is kept in a custodial escrow account. You will be required to verify to the lender that repairs are being made on schedule and in an acceptable fashion. Once the lender receives these updates, it will disburse the funds to your contractor.

Let’s talk about your contractor. There are specific requirements tied to the VA renovation loan regarding who you can use. You may know a guy that does great work, and he happens to be a friend of yours so you know he’s trustworthy. It’s important to know that whatever contractor you choose must be registered and possess a valid VA builder identification number prior to the issuance of the VA Notice of Value. You also must have an arms-length relationship with the builder. This means no friends or family members. There can be no potential conflict of interest between you and the contractor. Builders will need to carry a minimum of $100,000 worth of general liability insurance and provide detailed estimates of the repairs, breaking out the cost of labor from the cost of supplies.

What happens if in the midst of your renovation venture you decide you want to make some changes? You will have to create a Change Order. You’re allowed to make any changes you like as long as you pay for them out of pocket. Any decision you make after the appraisal is complete is not eligible to be rolled into the new loan. If you decide to make a change, it has to be given to the appraiser for approval before the work can start. This is because they will need to make sure the Change Order does not lower the value of the initial appraisal.

It is the ultimate responsibility of the lender to monitor the project and ensure it’s completed properly as stated in the scope of work. This is vital to ensure that the value of the home is preserved. Once work is complete, the lender will send the VA fee appraiser back out to the property for a final inspection. They will make sure that the work meets the Minimum Property Requirements (MPRs).

Whew! That was a lot of information. The most important things to remember are these.

1. A VA Renovation Loan gives you the option of buying a home that needs some work before you can move in. You can even use it for a home in foreclosure!

2. The loan comprises the original purchase price and the cost of renovations, alterations and repairs into a single loan.

3. Work can be completed after closing, which saves you from having to pay for repairs out of pocket before you can move in.

4. Anyone who qualifies for a VA Home Loan will qualify for a VA Renovation Loan. This holds true even if you currently hold a VA or Conventional Home Loan. It’s a perfect option if you want to refinance and make some much-needed repairs to your current home.

VA Rehab Eligible Improvements

The VA rehab loan program can be used for many things to improve the cosmetic and living conditions on a property. Below is a list of the type of improvements the VA renovation loan can be used for. This list is just an example there are other things the loan can be used for as well. Keep in mind that all improvements must comply with VA’s Minimum Property Requirements (MPR).

Eligible VA Rehab Home Improvement examples for renovation loans:

•Removing of any hazardous materials

•Connecting to public water and sewerage systems

•Repairing/replacing plumbing, heating, AC and electrical systems

•Making changes for improved functions and modernization

•Eliminating obsolescence

•Repairing or installing new roofing, provided the structural integrity of the dwelling will not be impacted by the work being performed

•Improving or adding siding, gutters, and downspouts

•Improving energy conservation

•Making the home more accessible for persons with disabilities

•Repairing or Installing new fences, walkways, or driveways

•Adding and installing new appliances such as a refrigerator, dishwasher, washer/dryer, oven, etc.

•Removing or making repairs to an in-ground swimming pool

•Adding new smoke detectors

•Installing new decks, or repairing existing decks or patios

•Removing Lead-based Paint

VA Renovation Loan Appraisal Process

When doing a VA renovation loan a VA appraisal is required. The VA appraisal is ordered directly through the VA Portal.

•The appraiser must provide an “After Improved Value” and make the appraisal subject to the following repairs or alterations on the basis of a hypothetical condition that the repairs or alterations have been completed

•The appraiser must also provide the “AS IS” value of the property in the addendum or comments section of the report (This is not the scope of the appraisal and is not graded

•The appraiser must review the Contractor’s proposal and cost estimates

•The appraiser must notify the Mortgagee of any health and safety issues in the Property that is not addressed in the proposal

•The appraiser must include the proposal as an exhibit to the appraisal report

•Any additional repairs noted by the appraiser must be addressed and completed either prior to close and verified with a certificate of completion or must be included in the VA Renovation repairs

•Any modifications and/or changes to the contractor bid must be reviewed and included in the appraisal report

•The appraiser must review the bid that is provided in the appraisal report and certify if the property will meet VA guidelines based on the repairs on the bid or state what additional repairs are needed

•AFR requires a 2 nd level review on any property with a current condition rating of a #C5, prior to any renovation work

•Value must be up to 100% of the as-is value plus renovation costs

•Final Inspection must be completed by a VA appraiser once the property is 100% complete