You’ve got your eye on a fixer upper. Or perhaps you’re toying with the idea of building a custom home that meets all your needs. Can a VA home loan be used to pay for home improvements or new construction?
The good news is yes, renovation and construction are covered. The challenge is finding a VA lender who offers these programs.
A VA-eligible borrower can buy a property and also borrow enough money to make needed repairs and improvements. Allowable improvements include cosmetic repairs, upgrades and any listed deferred maintenance such as roof repair, HVAC systems and flooring.
How’s it work? First, the borrower hires a licensed contractor, who creates an estimate that outlines the type of improvements needed, the time it will take to make the improvements and the cost. The borrower then submits this itemized list of improvements and the contractor’s bid along with the VA loan application to the lender. The lender reviews the improvements and orders an appraisal on the property, subject to the improvements being completed. In this fashion, the VA-eligible buyer is borrowing not only the amount needed to buy the home but also to make the necessary repairs.
Some guidelines apply: The work must be completed within three months of the settlement date and cost cannot exceed $35,000. The total loan amount must fall within the VA entitlement that guarantees loans up to $424,100 (higher in designated “high-cost” areas).
Most construction loans are issued only for the length of time it takes to complete the project and then replaced by a permanent loan. There are also “one-time close” loans that combine construction and permanent financing.
Here’s what a VA-funded home construction might look like: A buyer is approved for financing in the normal fashion and provides to the lender a detailed construction estimate from a licensed builder, who must have a valid VA builder ID and provide a one-year warranty on the home. The lender uses this estimate to determine the value of the home after construction (say, $300,000, plus padding to cover costs encountered during the build). The buyer may purchase the land separately or slurp the cost of land into the loan amount.
To protect the VA-eligible buyer, the lender doesn’t just hand the builder a big fat check. At closing (which happens before construction begins), money is released for the land purchase (if applicable). The remainder is placed in escrow and delivered in increments as certain milestones are met. The lender might issue $10,000 for site work. The builder completes the site work and the lender sends out an inspector to make sure the site work is complete and meets VA Minimum Property Requirements. The lender then issues the next round of funds and so on until the home is finished. Once the home is built, the lender pays out the remainder owed to the builder, and the construction loan is replaced by permanent financing.
While the VA home loan may be used to cover construction, finding a VA lender who can manage the intermittent funding and multiple inspections may prove a challenge. A better option? Obtain a non-VA construction loan from a lender and, once the home has been completed, replace that loan with a VA home loan.