VA Renovation Loan: Buy and Renovate a Fixer-Upper With 0 Percent Down

In the current market, competition for new homes can be fierce. That’s why buying a fixer-upper is attractive. You can buy a home with a lower purchase price, then renovate the property and make it your own.

And if you qualify for a VA renovation loan, you can do that without putting any money down. What’s more, you can finance the home purchase and up to $35,000 in renovations in a single loan.

What is a VA renovation loan?

The VA renovation loan allows eligible borrowers who have full VA entitlement benefit available to buy a fixer-upper and finance the renovation costs in one 0% down* mortgage.

The eligibility requirements for a VA renovation loan are the same as a standard VA loan:

• Borrower must be a veteran, active-duty servicemember, or an eligible surviving spouse
• Credit score of 580 or higher (though some lenders may accept lower scores)
• Full entitlement benefit available for 0% down
• Sufficient, steady income to afford the monthly mortgage payments

Just like with VA purchase loans, the Department of Veterans Affairs backs VA home renovation loans, helping eligible borrowers get competitive interest rates.

Then, once you’ve closed on your loan and complete the planned renovations, the VA home appraiser will inspect your home again to make sure your project played out as planned.

After the appraiser’s final OK, your loan will work like any other VA mortgage. You’ll make monthly payments until you sell, refinance, or pay off the balance.

How much can you finance with a VA renovation loan?

You could borrow up to an additional $35,000, on top of the purchase price, with a VA home renovation loan, says Mike Bendebba, a branch manager with Fairway in White Plains, Md.

However, you can only borrow as much as the home will be worth after the renovations are complete.

If your renovations will increase the home’s value by $35,000 or more, your lender can approve you for the full amount. But if your planned improvements would add only $25,000 to the home’s value, you would only be eligible to borrow $25,000 for the renovations, according to Bendebba.

It’s important to note that the approved amount for renovations will include fees and a contingency fund, which is essentially savings in case the actual renovation costs turn out to be more than the original quote. So you wouldn’t want to plan to spend $35,000 to the dollar on renovations, since some of that money must be set aside. Your lender can advise you on how much you will actually have available for the renovation work and materials.

VA loans vs VA renovation loans

Purchase + renovations

The difference between the two loan types is that a VA home renovation loan can exceed the purchase price of the home by up to $35,000. The additional $35,000 can be used toward qualifying home renovations, along with fees and a contingency fund (money set aside in case the total renovation costs come in higher than expected).

With a standard VA home loan, you’re only borrowing enough money to buy the home. If you have long-term renovation plans, you’d need to take out a separate loan down the road, or pay for upgrades and home improvements from your savings.

Borrow against the future value

Normally, a home’s current value has to justify its loan size. You couldn’t borrow $250,000 for a home that’s worth only $225,000, for example, with a standard VA purchase loan.

Even if you intended to renovate after moving in, and your planned renovations would increase the home’s value to $250,000 in a few months, a VA lender would still use the home’s current value to determine how much you could borrow for the home.

With a VA home renovation loan, a lender can set your loan size based on the home’s anticipated post-renovation value. So although a home may only be appraised at $225,000 today, you may be able to borrow more if you’re financing the renovations as part of the loan, since those upgrades will increase the home’s value.

That’s a great deal for VA borrowers, because interest rates on VA loans are typically lower than for other loan programs. A VA renovation loan means one loan, one payment, and likely a lower interest rate than other options would give you.

Related reading: Absolutely Everything to Know About the VA Home Loan in 2021

How does a VA renovation loan work?

When you take out a VA renovation loan, you borrow the money needed to purchase the home plus finance certain renovations.

Not all lenders offer VA renovation loans. Among those that do, their guidelines can vary regarding how much you can borrow and the types of renovations that may be financed.

Fairway offers VA renovation loans with financing for up to $35,000 in renovations and allows the following types of renovations to be financed:

• Kitchen remodel
• Bathroom remodel
• Repainting the house
• Other non-structural improvements

Structural changes, such as pulling down walls or putting on an addition, would not be allowed. Nor would replacing major home systems, such as the wiring or plumbing, according to Bendebba.

Additionally, “You can’t do any work that’s health or safety related,” he says.

You also couldn’t use the loan to install luxuries such as a swimming pool or a garage apartment.

Bendebba says the loan works best for cosmetic updates: things like new paint, carpet, and fixtures.

Here’s what a VA renovation loan might look like in practice.

You get preapproved for a $300,000 VA loan. Then you find a house you like for $265,000, but you notice that the kitchen is pretty outdated and that the home could use some new siding.

With a VA renovation loan, you could borrow the full amount for which you’ve qualified (assuming the renovations will raise the home’s value to at least $300,000). You would use $265,000 to purchase the home and the remaining $35,000 to cover the renovations plus reserves in case of cost overruns.

If the home is worth more than $300,000 once the upgrades and fixes are made, you would have instant equity in the property, since it would be worth more than what you owe.

How to buy a home with a VA renovation loan

The process for buying a home with a VA renovation loan is similar to that of buying with a standard VA purchase loan.

You’ll need to get preapproved** to determine how much you can borrow, and your lender will pull your credit report and request bank statements, pay stubs, tax returns, and other proof of your income, assets, and debts.

Learn more: VA Home Loan Preapproval: Don’t Shop for Homes Without It

They’ll also order an appraisal on the home, and you’ll want to hire a professional home inspector to do a report on the property.

There is an important exception, though, to the usual loan process.

Before your lender approves your VA renovation loan, or even orders an appraisal, you’ll need to provide your renovation plans, including a formal quote from a VA-approved contractor who will do the work.

That’s why it’s important to have your contractor selected and an idea of what upgrades you want to do when you make an offer on a house. In addition, request extra time to close on your offer. Most renovation loans will take longer than 30 days to close due to the extra steps involved.

Additionally, you cannot get approved for a VA renovation loan if you plan to do the renovations yourself. Even if you’re a qualified contractor, the VA mandates that an outside contractor do the work.

The renovations must be completed within 120 days of the loan closing.

Are there any risks or drawbacks to a VA renovation loan?

On the whole, VA renovation loans are great options for eligible borrowers. A VA renovation loan expands the pool of houses you might consider buying, knowing you can buy a slightly older home and finance the repairs right away.

And in a competitive housing market, you want access to as many potential properties as possible, since it can be tough to get an offer accepted on an in-demand, newly renovated home.

But all loan types come with trade-offs. The biggest drawback to the VA renovation loan? Its limit on the type of renovations you can finance, Bendebba says.

“If it’s a more intensive renovation, the borrower will need a more intensive renovation loan,” he says.

Bendebba suggested a Fannie Mae HomeStyle loan, which is a conventional rehab loan, or a FHA 203(k) rehab loan for homebuyers who need to add in the cost of a heavy renovation.

These loans may also be easier to come by than the VA renovation loan, since more lenders offer them.

Setting those drawbacks aside, however, the VA renovation loan is a great option overall.

Key advantages of a VA renovation loan

• You can renovate right away: A lot of new homeowners have to wait a few years before they have enough equity to finance a renovation project. A VA rehab loan eliminates the waiting by providing enough money to buy and renovate simultaneously 
• You can find more eligible homes to buy: Ordinary VA purchase loans exclude homes that don’t meet the VA’s minimum property requirements (MPRs). A VA renovation loan could still finance such a home assuming you’ve shown how your renovations will upgrade the home to the VA’s standards
• 0% down payment requirement: VA borrowers who have full entitlement benefit can qualify for 100% financing for the purchase and renovations

The VA loan is consistently one of the best deals in the market, and the renovation option just sweetens the homebuying opportunity.

VA renovation loan pros and cons

Alternatives to VA renovation loans

The VA home renovation loan will fit some homebuyers’ needs perfectly.

Others will need a different kind of rehab loan. For instance, the home you’re buying may need more substantial renovations than the VA renovation loan allows.

If a VA renovation loan isn’t an option for you, here are some alternative for financing a fixer-upper:

VA construction loan

With this loan you’d work with a VA-approved builder and lender to plan your own home from the ground up. A construction loan could even help pay for the lot you build on. Note, however, that Fairway does not offer this loan type, and homebuyers could find it difficult to find a lender that does

VA energy efficient mortgage

This program helps VA borrowers make their existing homes more energy-efficient with up to $6,000 in upgrades like adding insulation, a modern HVAC unit, and new windows

VA interest rate reduction loan (also known as VA streamline refinance)

An interest rate reduction loan (IRRRL) isn’t a renovation loan; it exists to lower your interest rate or your monthly payments with low closing costs. But it lets you add up to $6,000 for some energy-efficient improvements to your primary residence

FHA 203(k)

This isn’t a VA loan; it’s backed by the Federal Housing Administration instead. As a result, you’d have mortgage insurance premiums and a down payment requirement. But it also allows you to finance the purchase of a home and renovations into a single mortgage

Fannie Mae HomeStyle

This is a conventional loan that allows you to buy and renovate a home with a single loan. Plus, if you can make a large down payment, you may be able to save on private mortgage insurance costs and qualify for a more competitive interest rate

Cash-out refinancing

If you can live in your home a few years before making repairs, a cash-out refinance could help you cover the costs of home improvements down the road. A cash-out refinance lets you borrow against the equity you build up in the home. The VA cash-out refinance lets you borrow up to 100% of your equity  

Home equity line of credit (HELOC) or home equity loan

These loan options let you borrow against your home’s existing value without refinancing to a new mortgage. You can receive a line of credit you can borrow against and pay down as repair costs come up, or you can get a lump sum loan to pay for renovations. You’d end up with two payments each month, one for your mortgage and the other for your HELOC or home equity loan

VA renovation loan FAQs

A loan to open up new home possibilities

Fierce competition among buyers in your local market could be limiting your choices of homes to buy. Or, the VA’s minimum property requirements could be filtering out homes that need some TLC.

If you’re facing these kinds of challenges, the VA home renovation loan may be just what you need to open up more homebuying choices.

Not only can a VA renovation loan expand your options – with little money upfront – it also gives you the power to really make that new home your own.

Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency.

*A down payment is required if the borrower does not have full VA entitlement or when the loan amount exceeds the VA county limits. VA loans subject to individual VA Entitlement amounts and eligibility, qualifying factors such as income and credit guidelines, and property limits.

**Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.