4 VA Loan Options for Home Improvements

VA loans make homeownership possible for thousands of veterans and military service members every year. The loans have no down payment or mortgage insurance and often have lower mortgage rates than other home loans.

Besides those well-known benefits, you can use a VA loan to buy a fixer-upper or renovate your current home. Here are four VA home improvement loan options.

» MORE: Learn the basics of VA loans

1. VA cash-out refinance

If you owe less on your mortgage than your home is worth, you might be able to tap into the home equity with a VA cash-out refinance. You can use the cash-out money for any purpose, including home improvements. You can refinance a conventional or FHA loan into a VA-backed mortgage with this option as well.

2. VA renovation loan

VA loans for alteration and repair let you buy or refinance a home and roll the cost of improvements into your mortgage.

With this option, you’re not limited to homes that already meet the VA’s minimum property requirements. You can use the repair money to bring the home up to the VA’s standards.

A VA renovation loan might be worth considering if you already own a home that needs some TLC. Usually, with a VA cash-out refinance, the loan amount can’t exceed the current value of the home. But with a VA renovation cash-out refinance, the maximum loan amount is determined by the expected value of the home after repairs are complete.

Be aware that lenders can charge a construction fee of up to 1% or 2% of the amount of VA renovation loan amount. The fee is in addition to the loan origination charge and the VA funding fee.

3. VA loan for energy efficiency

You can roll the cost of energy efficiency improvements into a VA purchase or refinance loan. Acceptable improvements include things like thermal windows, insulation and solar heating or cooling systems. The amount of required paperwork depends on the project’s cost.

• $3,000 or less: The VA assumes that a drop in your utility bills will offset the cost of improvements.

• More than $3,000 up to $6,000: The lender will review your plans to make sure the increase in monthly mortgage payments won’t exceed the estimated reduction in monthly utility bills.

• More than $6,000: The loan will be subject to greater lender scrutiny and require a “VA certificate of commitment.”

4. Supplemental VA loans

A VA supplemental loan is another way to finance home improvements. To qualify, your home must be financed with a VA mortgage. The supplemental loan can be structured as a second mortgage, included in a refinance or added to the existing mortgage. You can use the money for projects to improve your home’s basic livability, but not for extras like swimming pools.

If the cost is $3,500 or under, you’ll need a “statement of reasonable value” signed by a VA-approved appraiser. If the cost of repairs and improvements is more than $3,500 the lender will require a compliance inspection and a “notice of value” statement.

Home renovation loan alternatives

You don’t have to limit yourself to VA loans for home improvements. Here are other options to buy a fixer-upper or finance repairs of your current home.

• A home equity loan or home equity line of credit, known as a HELOC. If your home is worth more than you owe on your primary mortgage, you can borrow against some of the difference with a home equity loan or HELOC.

• An FHA 203(k) loan. An FHA 203(k) loan lets you buy or refinance a home and roll the renovation costs into the mortgage.

• A conventional home renovation loan. The Fannie Mae Homestyle loan is similar to the FHA 203(k) loan, but credit score requirements are stricter and rules about renovation work are more lenient. The Freddie Mac CHOICERenovation loan also lets you roll the costs of home improvements into the mortgage. Additionally, the CHOICERenovation loan lets you finance disaster-proofing improvements and may offer down payment credits for sweat equity.