As a Renovation financing Loan Officer, I’m excited to have access to a VA Renovation mortgage for Veterans and Active Duty Military that now allows multi-unit properties as well as single family homes. This means a duplex, triplex or quadruplex type structure where the owner lives in one apartment and leases the others to tenants. In the past, the VA Renovation loan had been limited to only one unit type properties. Now we can offer it for those wishing to live in a 2, 3 or 4 unit property and rent to tenants for additional income.
The VA Renovation (Veterans Administration) mortgage can be used to purchase or refinance a 1 to 4 unit property and include funds to remodel or repair in the same loan. One interest rate, one payment, one loan, including renovation funds.
This loan for Veterans is guaranteed by the Veterans Administration (VA). The difference between the VA Renovation loan and a regular VA loan is this one will allow additional dollars in the same loan to be used to update, remodel, repair or retrofit a 1 to 4 unit property. As with most VA purchase loans there is no down payment required for eligible Veterans or Active Duty Military. This means 100% financing is possible which will include any extra dollars needed to remodel or repair the property plus the dollars required for the purchase.
The VA Renovation mortgage will use the home’s After Renovated Value (ARV) for loan approval. That is the value the home will attain once all renovation is fully completed in the future after closing. The limit on the dollars added to the loan for rehab is based on the ARV and cannot exceed 35% of a property’s ARV or future value with improvements factored into the appraised value.
What makes this loan so useful is the fact the ARV or future value, after all rehab is completed, will be projected up front and used to approve the loan. This is done using a Contractors written itemization of all renovation tasks to be completed, showing labor and material costs. The written document allows a VA Appraiser to give the future value or ARV of the home on a VA appraisal report, then used to approve the loan. All rehab work is done after the loan is approved and the purchase or refinance of the home is closed.
Key regulations of the VA Renovation mortgage to be aware of below:
- Primary owner occupied 1 to 4 unit residence only – no investment properties
- All renovation work must be completed within 180 days
- The renovation portion of the mortgage is capped or limited at 35% of After Renovated Value
- Purchase or refinance transactions eligible
- Contractor(s) must secure a valid VA Builder Identification number
- A Contingency Reserve or emergency reserve of 10% of the base rehab budget is required and may go to 15% if structural changes planned or a utility is turned off- used to fund unexpected costs and part of the total mortgage but subtracted from mortgage if never used at completion
- 30% of Renovation funds are dispersed immediately at closing and 70% dispersed upon completion to allow projects to start quickly after closing
- 75% of future rental income from the other apartment(s) can be used as effective income to qualify as determined by a VA Appraiser on 2 to 4 unit properties
- 6 months of house payment reserves to cover principal, interest, property taxes and insurance are required on multi-unit properties if using future rental income to qualify for the mortgage
- Work must begin within 30 days after closing
Here is an example of the VA Renovation loan used to purchase & rehab a 3 unit property:
- Veteran or Active Duty Military purchases a 3 unit property or triplex selling for $300,000
- The property is outdated, in need of major repairs (or even a damaged or foreclosure property) requiring $150,000 of renovation
- The written Contractor’s proposal shows all work to be done for $150,000 such as 3 new kitchens, 3 updated bathrooms, new flooring, roof, electrical, plumbing, HVAC, lighting, etc.
- The written Contractor’s proposal is sent to the VA Appraiser who visits the property and determines it will be worth $450,000 when all renovation is completed after closing on the property
- The VA renovation loan limits the renovation dollars portion of the loan to 35% of the ARV, or 35% of $450,000 in this example – that 35% rehab limit or cap is $157,500 – so it’s within the 35% limit given the renovation portion is at $150,000
- Veteran or Active Duty Military Buyer is eligible for 100% financing, which in this example is $300,000 to purchase and added $150,000 to renovate, for a total loan size of $450,000
This last point is very important- An eligible Buyer can borrow all the money needed to both purchase a home and the funds to remodel it all in one loan, one payment, same fixed interest rate and have up to 30 years to repay it, all based on future finished value. I do not know of any other rehab loan that works that way for Veterans or Active Duty Military. In today’s market where available housing inventory can be low or outdated in many areas, this VA loan allows a way to find a home and make it work in most any location. The VA Renovation loan does have guidelines of allowable repairs and non-allowable repairs I want to note next.
Below are examples of Allowable repairs that can be done with the VA Renovation loan:
- Roof: repair or replacement (covering, underlay)
- Gutters/downspouts: install/repair/replace
- Insulation: ceilings/walls/asbestos removal
- Weatherization items: repairs/improvements
- Detached or Attached Garage – new build or repairs
- Paint: interior/exterior/lead paint abatement (by certified LBP contractor)
- Kitchen: all appliances/cabinets/ total
- Electrical: repair/replace/recondition all
- Plumbing: repair/replace/recondition all
- Repair/Replace HVAC or other systems
- Repairing or removing an in-ground swimming pool
- Installing or repairing fences, walkways and driveways
- Mold remediation or mold removal
- Handicap accessibility improvements
- Termite treatment/damage repair
- Repairing or replacement of well and septic
- Foundation Repair
- Room Additions
- Finish Basements and attics
- Removal of outbuildings or old manufactured home
Below are examples of repairs NOT allowed with the VA Renovation loan:
- Repairs performed by the Borrower
- Swimming Pool Installations (repairs allowed) – No luxury items such as outdoor kitchens, etc.
- Improvements that do not conform to the surrounding neighborhood
- Television antenna and satellite dishes
- Improvements on Mixed Use property (FHA 203K Renovation allows Mixed Use property)
- Single family residence conversion to a 2 unit
- Relocated property
- Projects that will take more than 180 days to complete
The VA Renovation loan is a great option for eligible Veterans or Active Duty Military to purchase a 1 to 4 unit property and include funds to make it safe, secure, modern and fully habitable. I have spoken with Active Duty personnel being transferred to a new duty station across the U.S. or back from overseas who are looking for a 2 to 4 unit property that can generate income for them using their VA loan benefit plus finance the complete cost of a renovation and this mortgage will allow that.
The VA Renovation mortgage is guaranteed by the VA as one loan with one payment, one fixed interest rate and up to 30 years to repay. This may be a better option than a second mortgage or home equity line of credit that can be at a higher or variable interest rate or higher cost to finance a renovation. In addition these other types of loans would not use the After Renovated Value, only the current value of a property.
I hope this post has been helpful and encouraging to those that may have thought a Renovation project was too complex or beyond their ability to manage. My intent is always to inform, educate, and generate discussion. Please call me or email me directly or visit my website for more information on renovation loans. I welcome your comments and questions!