The VA loan is for veterans that will use the home as their primary residence. What happens when you want to make home improvements to that home, though? Can you make the changes with VA financing?
The answer is ‘it depends.’ We’ll go over the different ways you may be able to pay for your home repairs with your VA loan.
A VA Cash-Out Refinance for Home Improvements
If you currently have a VA loan and you have equity in the home, the VA cash-out loan is the answer. It’s just like any other cash-out loan, with the exception that you have to have a VA loan in order to qualify.
The VA states that borrowers can do whatever they want with the cash-out funds, but it is up to lender discretion. Just like any other mortgage guidelines, the lender can add their own requirements onto it. Don’t despair if one lender tells you that you can’t use the funds for home repairs, though. You can shop around until you find a lender that will allow it.
The VA cash-out refinance is different from many other cash-out programs because you can borrow up to 100% of the home’s value for the loan. In order to determine your home’s current value, the lender will need to order an appraisal. From there, the lender can determine how much money you can borrow for your rehab project.
For example, if the appraiser says your home is worth $300,000 and your current VA loan has an outstanding balance of $200,000, you can take the additional $100,000 and use it to fix up your home.
Don’t forget, you will have to pay a funding fee again. This time it’s still 2.15% of the loan amount. Using the above example, if you took out the full $300,000, you’d owe $6,450. You can either pay it with your own money or wrap it into your loan amount. It does not affect your loan-to-value ratio.
Paying for Rehab and a Home With a VA Loan
If you don’t already own a home, you might be able to rehab a home with the proceeds from a VA loan. The VA allows it. However, it might be difficult to find a willing lender. It’s not a situation many lenders like to put themselves in because of the risk.
The loan process works the same as a standard VA loan. You apply for 100% financing or less if you put money down. However, you then have to get the contractor approved as well as the work he will do. The lender must make sure the work will make the home meet the VA guidelines and that the home will be safe and sanitary for proper living immediately following the work.
Even though you are a veteran, you may find other options that work better when you make to make home renovations.
A home equity loan gives you access to your home’s equity without touching the VA loan. Your first lien remains the same. You secure the second mortgage from the same lender or a different one – it’s up to you. In order to qualify you’ll have to verify your credit score, income, assets, and employment. The lender will make sure your credit score is high enough and your debt ratio is in line with their requirements. Upon approval, you’ll have access to the money in a checking account where you can draw funds, pay them back, and use them again. This is all while leaving your VA loan alone.
If you can’t find a lender willing to provide you with a VA rehab loan or VA cash-out loan, the next best thing is the FHA 203K loan. This is another government-backed loan, but it does require a down payment. Generally, you’ll need to put 3.5% down in order to use this program. It does allow you to borrow funds up to 110% of the improved value of the home (the estimated value after the intended work is complete). The FHA guarantees the loan just like the VA, so lenders are often more lenient with the guidelines.
It is possible to fund your home improvements with your home’s equity even if you are a veteran. Make sure you explore all of your options and check with several lenders. You’ll find varying rates and fees from each lender. You may even find varying requirements. Find the loan that works right for you so that you can make the changes to your home that you desire.