As part of renovation financing offerings, the VA has a lesser known renovation mortgage for Veterans and active duty personnel to purchase a home and add dollars to do updates or repairs.
It is called the VA Renovation mortgage. A regular VA mortgage and VA Renovation mortgage are available to –
- Branches of service include U.S. Army, Navy, Air Force, Marines, Coast Guard, National Guard & Reserve
- U.S. Military Academies
- Officers of the National Oceanic & Atmospheric Administration
- Academy cadets or midshipmen
- Certain surviving spouses of a service member
Below is a summary of how the VA Renovation mortgage works and general guidelines-
- Purchase a new home or use it to refinance your current home to finance updates
- If purchasing a home the VA Renovation mortgage will have the necessary funds added to allow the rehab work to begin immediately after closing
- In a refinance the current mortgage is paid off using the VA Renovation mortgage with extra dollars added to fund all the renovations in one mortgage
- A VA Appraiser will determine the After Renovated Value (ARV) using a written Contractor proposal of the renovation to be done with all costs included both as a new purchase or as a refinance on your current home
- Eligible properties are single family homes; attached homes and condominiums (Condos must be VA pre-approved)
- VA Renovation loan terms can be 15 years or 30 years
- Minimum Credit score 620
- VA Renovation purchase mortgage amount can be up to 100% of purchase price (no down payment required) and 90% of ARV when done as a refinance
- Max renovation dollars – Lesser of $75,000 or 35% of the After Renovated Value (ARV)
- Larger amounts for renovation may be requested by exception
- Structural repairs allowed if there are impacts to healthy & safe use of the property
- Alteration & repairs must be those found on similar properties of comparable value in the community
- Contingency Reserve required of 5% to 15% of renovation budget for unexpected repairs
- If Contingency reserve not fully used, the funds come back to borrower as a reduction of the principal amount of the mortgage at completion of construction – no cash back allowed
- Renovation must be completed within 6 months
- Contractor may receive a 30% Draw of renovation funds up front at closing with 3 Draws allowed total during the process
- Contractor must have a VA Builder Identification number
- No monthly mortgage insurance (a Funding Fee is added to the loan instead)
- Seller can pay up to 4% of sale price for closing costs
- All VA loans are Assumable to the next buyer when you sell even if Buyer is not a Veteran
Example of how the VA Renovation mortgage can work in a home purchase–
- Purchase Price = $300,000
- Added dollars to renovate/repair = $75,000
- Total VA Renovation loan at 100% financing = $375,000 (no down payment required)
- VA Appraiser uses Contractor proposal to find After Renovated Value (ARV) to be $400,000
- The $75,000 renovation budget is within guidelines as being Lesser of 35% of ARV , that would be 35% of $400,000 or $140,000 or just a flat $75,000 which it is
- If Seller provides 4% of the $300,000 contract price as a closing cost credit to Buyer, there is $12,000 to pay all closing costs ( Title company or Escrow fees, Attorney fees, first year home insurance cost, and government Transfer taxes on real estate, etc.) Note that First Community Mortgage pays lender fees for Underwriting and Processing on any VA mortgage
- In this way the Buyer may not bring any funds at all to closing and have a renovated home when all the construction work is completed, all done with no down payment and amortized in a 15 or 30 year term mortgage
Example of how the VA Renovation mortgage can work in a home refinance–
- Veteran homeowner currently owes $250,000 on a mortgage
- Repair and updates to be done at the home will cost $50,000
- The new VA Renovation mortgage is the total of these or $250,000 + $50,000 = $300,000 so current mortgage is paid off at closing to be replaced with the new VA Renovation mortgage of $300,000
- VA Appraiser uses Contractor proposal to find After Renovated Value (ARV) to be $335,000
- On a VA Renovation refinance mortgage, the size of it is limited to 90% of After Renovated Value (ARV) or in this example, 90% of $335,000 ARV which is $301,500
- The total mortgage size is $300,000 which fits within the above guideline of not being greater than 90% of ARV or max of $301,500 in this example
- If borrower wishes to add funds for closing costs in order to not have to bring any funds to closing, there is $1500.00 left to add, to equal the max mortgage size of $301,500 in this example
Using the VA Renovation loan can be an efficient means of improving a property now and using a 15 or 30 year term mortgage to pay for it. The Buyer/owner will be able to enjoy all the updates now, and see an improvement in value now, all with one mortgage payment, done for a 15 or 30 year term. There are no pre-payment penalties on these mortgages, so borrower is free to sell the home most anytime and realize any increase in equity or value upon a sale. Plus the VA Renovation mortgage is Assumable to the next Buyer, even if not a Veteran.
Perry Farella NMLS ID: 755943
773-793-8803 perry.farella@fcmhomeloans.com Perryfarella.com
Down payment and terms shown are for informational purposes only and are not intended as an advertisement or commitment to lend. Please contact us for an exact quote and for more information on fees and terms. All loans subject to credit approval. Rates and fees subject to change. Not all borrowers will qualify.
