What are VA Alterations & Repairs Loans?
VA Alterations and Repairs Loans allow eligible active military and Veteran home buyers to purchase properties and include costs for home improvement. They also allow eligible active military and Veteran homeowners to refinance existing properties and include costs for home improvement, debt consolidation, and/or cash out (i.e., cash-out refinance). There is no minimum dollar amount for renovations.
What properties are eligible for VA Alterations & Repairs Loans?
Eligible properties include:
- 1-4 units, owner-occupied
- Condominiums (conditions apply)
- Historical Properties (require approval for repairs from governing historical society)
- Modular/prefabricated homes
- Manufactured housing
- Planned Unit Developments (“PUD”)
- Townhome
- Newly constructed homes (completed in less than one year and never occupied; construction must be 95% complete)
What improvements are allowed with VA Alterations & Repairs Loans?
Alterations and repairs must meet or exceed local building codes. You can choose which repairs you would like to finance, but it is important to note that all appraiser-noted deficiencies and repairs must be addressed.
Eligible Improvements
There are no required improvements, nor is there a minimum dollar amount for renovations.
However, no more than 30% of the loan proceeds may be used for the maintenance, replacement, improvement, repair, or acquisition of non- fixtures or quasi-fixtures such as refrigeration, cooking, washing, and heating equipment.
Types of eligible improvements include, but are not limited to, those that are/will:
- Ordinarily found on similar properties of comparable value in the community
- Non-structural
- Substantially protect or improve the basic livability, or utility of the property
- Restricted primarily to the maintenance, replacement, improvement or acquisition of real property, including fixtures, and
- Equipment (e.g., appliances, mechanicals) related to the alterations being financed.
Ineligible Improvements
- Structural work which requires any new building or construction and/or requires an engineers report or architectural plans and specs.
- Installation of features such as barbecue pits, swimming pools, etc.
What are the VA Alterations & Repairs Loan Appraisal Requirements?
- As-Is Appraisal: As-is appraisals are never required for VA Alterations and Repairs loans.
- After-Improved Appraisal: An after-improved appraisal is required for every VA Alterations and Repairs loan. An NOV (“Notice of Value”) must be issued.
What are the VA Alterations & Repairs Loan Financeable Renovation Costs?
- A contingency reserve may be required by your lender to cover unforeseen repairs that are discovered during renovation. When required, the amount of contingency will vary. Contingency reserves are typically financed in the loan amount (i.e., Financed Contingency). Alternatively, you may bring funds to closing to fund the contingency reserves; however, any assets required to fund the contingency reserves must be documented and verified above the amount required for down payment and reserves (i.e., Borrower-Funded Contingency)
- Hard costs (i.e., labor and materials from the contractor’s bid)
- Draw inspection fees
- Title update fees
- Permit costs
Other Highlights of VA Alterations & Repairs Loans
- No down payment is required on purchases, assuming Veteran has enough Entitlement on their VA benefits
- Maximum LTV (“loan-to-value”) on (cash-out) refinances is 90%
- Unless exempt, a VA Funding Fee will be financed into your loan
- Your contractor’s credentials will be vetted. Most lenders will require provide proof of licensing (if required), a Certificate of Liability Insurance, Worker’s Compensation (if required), any specialty certifications required (e.g., lead-based paint, mold, radon, asbestos), and a signed IRS W-9 Form.
- Your contractor’s bid has to meet certain requirements such as being on contractor letterhead, naming you as the client, identifying the property where the work will take place, a full description and the location of all work being performed, a labor and materials breakdown per line item, permits and their associated costs, accurate tally of all sub-totals and the grand total, start and completion dates, and number of draws needed. The bid should also specifically state the repairs being made are non-structural
- Do-It-Yourself (“DIY”) or self-help improvements are not allowed
- Eligible DPA (“Down Payment Assistance”) programs are allowed in combination with VA Alterations and Repairs loans on purchases
- Gifts are allowed
- On cash-out refinances, any unused contingency reserves – whether financed or self-funded by the Veteran at closing – may either be applied as a principal reduction once the renovation work has been completed or may be disbursed to the Veteran at the Veteran’s discretion
- All permits should be pulled immediately after loan closing, work should commence within thirty (30) days’ of loan closing, work should not cease for any thirty (30) day period, and the lender will determine the length of time allowed for completion of the work
Draw Process of VA Alterations & Repairs Loans
The draw process will vary lender to lender, and initial deposits and materials draws may or may not be allowed.
Allowable Disbursements at Loan Closing
Items that may be disbursed at the closing table include:
- Initial or materials draw (if allowed by lender)
- Permit costs (permits must be obtained before work commences)
Remaining Draws Process
All other financeable improvement costs and fees will be deposited in the renovation escrow account and disbursed as described below:
- Compliance inspections must occur before draws are disbursed to ensure work is being completed in accordance with the contractor’s bid and local building codes
- Funds are released to you and General Contractor when any given renovation work has been completed
- General Contractor to identify number of draws needed, payable upon completion of work
- A ten percent (10%) holdback may apply to all progress, or interim, draws
- Final draw will be paid-in-full and will include all previously withheld ten percent (10%) holdbacks, along with any outstanding contingency requests or change orders
- For improvements exceeding $3,500, a Notice of Value from a VA appraiser is required
- For improvements $3,500 or less, a statement of reasonable value from a VA appraiser may be used
- Checks will generally be made payable to you and contractor (i.e., dual-party checks)
There are many different types of renovation loans: conventional renovation loans through Fannie Mae® (“FNMA”) and Freddie Mac® (“FHLMC”), FHA renovation loans, USDA renovation loans, a VA renovation loan option, and portfolio renovation loans.
Keys To Success:
- Inquire early! If you attempt to place an offer on a property that is listed for sale without a pre-qualification letter, your offer may be rejected and you may miss a window of opportunity. It is best to secure financing before you are too far into the buying process.
- Make sure your contractor is on board with the contractor qualifications, bid requirements, and draw process required for your loan type.
- If a Consultant is involved, meet together at the property with the contractor, so all parties can finalize the scope of work together.
- Provide requested paperwork quickly to meet contract deadlines. Time lost on the front end of a deal oftentimes cannot be made up on the back end of the deal to hit closing deadlines.
- Be decisive! Decide on the details of your renovation project early and resist the temptation to make changes throughout the loan process. Wavering during the process can cause delays with your closing. Feel confident in pushing forward with the decisions you make at the onset of the transaction. That’s not to say you can’t make changes along the way, but making those changes mid-stream will likely cause delays.
