Everything You Need to Know About a VA Renovation Loan

What is a VA Renovation Loan?

A VA Renovation Loan is a program for VA qualified borrowers who are funding the cost of a refinance or purchase along with the costs of renovations to the subject property. A renovation loan should only be considered if the project will increase the value of the home or decrease the long-term costs of the home. The borrower can use the renovation funds in a variety of ways to improve the home. The renovations can cover projects such as: finishing a basement, upgrading a kitchen, adding insulation to the attic, adding a bedroom, or repairing a deck. Renovations can go up to $50,000 for a single loan (There is no minimum amount for renovations).

Eligible Borrowers

• Active duty service members
• Reserve and National Guard members
• Unmarried surviving spouses
• Honorably discharged Veterans
• Credit score of 500 or above

Eligible Properties

• Attached/ detached single family residences and PUDs
• VA approved Condos- interior unit upgrades only
• 1-4 units
• Owner occupied only

What kind of renovations can be made?

• Must be permanently fixed on the property or site
• Alterations must be found regularly on comparable properties in the area
• Repairs should be non-structural. Although, minor structural repairs can be approved

Renovation Time Period

• Construction must start within 30 days of closing
• Project must be completed within 4 months of closing (120 days)
• The borrower cannot be displaced from the property for more than 15 days. Work that may cause borrowers to be displaced include:
  • No running water
  • No electricity
  • No roof
  • No heat source

Contingency Reserves

Contingency reserves are funds that are held to cover unexpected circumstances that may occur throughout the construction process. The reserves are required to equal 10%-15% of the base bid amount and held in the repair escrow. The extent of construction will determine the exact percentage that will be required.

The borrower can choose to fund the contingency reserves and avoid financing the funds. The funds must be provided at escrow from a documented source. If the funds are not needed they will be issued back to the borrower at completion of the renovation.

Draw Process

The draw is the process of transferring the funds from the lender to the borrower and contractor to begin renovations. There are no more than 3 draws allowed and the funds must be made available via a 2-party check payable to the borrower and contractor.

Holdback Fund

10% of the total draw is withheld and put into escrow to cover any excess expenses. This is separate from the contingency reserves, although both are held in escrow. Once all work is complete, all funds that were held in escrow will be released back to the borrower.

Contractor Requirements

The borrower gets to choose the contractor however, some lenders have specific requirements for the contractor. It is important to contact your lender when choosing your contractor

Contractors must provide:

• Their license
• Bond
• W-9 (Current year)
• $1 million in liability insurance
• Contractor profile report
• VA ID number

Contractors need to obtain a VA Builder ID number, which, can be received here: https://www.benefits.va.gov/homeloans/appraiser_cv_builder_info.asp. VA allows up to 3 licensed contractors per file.