If you are a veteran with VA loan eligibility, you probably know that you can buy a home with no down payment. But, did you also know that you can buy a home that isn’t in ‘good’ condition and repair it with the funds provided by the VA loan? The VA, like the FHA, has a home improvement loan that makes this possible.
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Keep reading to find out how you can take advantage of this program.
The VA Renovation Loan
The VA does allow you to purchase a home that doesn’t pass the VA appraisal requirements and use funds from the loan to fix the home up to code. Because the VA already allows 100% financing to purchase a home, though, not too many lenders allow this type of financing. If you only want VA financing, you’ll have to shop around to find a lender willing to offer this program.
In order to get enough financing to purchase and fix up a home, you must:
- Submit a bid from the contractor providing all of the details of the renovation
- You can only borrow the lesser of the purchase price plus renovations or the expected value of the home after the renovations
- You must prove that the home passes the VA requirements after renovations are complete
- All renovations must be necessary and not luxurious
- You must have a contractor do the work – you cannot do it yourself
Alternatives to the VA Renovation Loan
What happens if you can’t find a VA lender willing to write a VA renovation loan or you don’t meet the above guidelines? You have one other option – the FHA 203K loan.
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The FHA 203K loan is the FHA’s version of the renovation loan. The main difference is that you will need a down payment in order to buy the home. It’s only 3.5% of the purchase price of the home, though. You can even receive 100% of the funds as a gift if necessary.
The FHA 203K loan has two options:
- The streamline 203K loan – This loan provides you with up to $35,000 in renovations on top of the purchase price of the home. You cannot make structural changes, but you can make any other changes that fit within the $35,000 and make the home meet the necessary code
- The full 203K loan – You can borrow up to 110% of the after-improved value of the home. You can make structural changes with this loan. Once you make the necessary changes to make the home up to code, you can make any cosmetic or optional changes that you desire as long as they fit into the loan amount
If the home you want to buy passes the VA appraisal, but it just needs other work that you would prefer, you can buy the home with your VA loan and then refinance it down the road. The refinance would be a part of the VA cash-out refinance program.
This program is a little more lenient because the VA doesn’t specify what you need to do with the funds. You can make as many or as few changes as you want with the money. With this program, you can borrow up to 100% of the value of the home at the time of the refinance. If you wait until you have a little equity, you can get the funds you need to renovate the home.
The VA loan can be a way to help you pay for home renovations, but it won’t be the easiest route. If you can manage to get a down payment for the home, the FHA 203K loan may be the easier route to take. If you can get the home to pass the appraisal, you can even wait and take out a cash-out refinance once your home is worth enough. Explore your options and decide which one will cost you the least and give you the greatest return on your investment.