VA offers home improvement loan programs

One of the many quirks of a VA guaranteed loan is the ability to buy a home and use part of the loan proceeds to fix it before you move in. The only other type of loan similar to this could be permanent construction financing (also VA guaranteed). In other words, the VA will, under certain circumstances, guarantee the loans so that you can purchase and rehabilitate (rehabilitate) a home in need of repair that you and the lender knew was required prior to closing. You won’t find that anywhere else.

Basically, you will have two loans, one for the initial purchase and a second or supplemental loan for rehab work. That first loan will almost certainly require your home to be appraised and inspected, even in its dilapidated condition. In other words, the sink should have running water and the oven should heat the house. You should carefully coordinate the purchase and rehabilitation not only with your lender, but also with a licensed appraiser before making any commitments. While this adds a level of complexity not normally found in residential home loans, keep in mind that the US government is about to back the deal with collateral. Go for it!

Some key rules

It is important that you know some of the key rules established by the VA for this type of treatment. The titles below have been changed to aid the reader and not all the rules are repeated here, only the ones that seem high profile.

A. VA can guarantee a loan for modifications and repairs.

or from a residence already owned by the veteran and occupied as a home, or

or made in conjunction with a home purchase loan.

B. Alterations and repairs must be those normally found on similar property of comparable value in the community.

C. The cost of structural alterations and repairs can be included in a loan for the purchase of an improved property to the extent that its value supports the loan amount.

D. A supplemental loan is a loan for the alteration, improvement, or repair of a residential property. Residential property must

o secure an existing VA guaranteed loan, and

or be owned and occupied by the veteran, or the veteran will reoccupy after major alterations, repairs or improvements are completed.

E. Alterations, improvements, or repairs must

or have the purpose of substantially protecting or improving the habitability or basic utility of the property, and

or be restricted primarily to the maintenance, replacement, improvement or acquisition of real property, including accessories.

F. The installation of features such as barbecue grills, swimming pools, etc., does not meet this requirement.

G. No more than 30 percent of the loan proceeds can be used for the maintenance, replacement, improvement, repair or acquisition of non-accessories or quasi-accessories such as refrigeration, cooking, washing and heating equipment, and the equipment must be related to or complement the capital alteration for which the loan is proposed

H. A supplemental loan will require prior VA approval if

or the loan will be made by a lender other than the holder of the currently secured obligation

o The loan must be made by a lender who does not have the authority to automatically close loans, or

An obligee liable for the currently outstanding obligation will be released from personal liability by law enforcement or otherwise.

If this type of deal sounds appealing to you, send your application to your loan officer and do a dress rehearsal with everyone involved, including a licensed appraiser and home inspector who knows what they are doing. This is another of the many ways to turn your VA loan collateral into a ticket to higher net worth. It is one of the ways to get the most out of your investment.

Warning: This is an opinion of the author and should not be used as a substitute for any advice offered by your lender, who will be the final arbiter of everything discussed here.

Copyright 2009 © Thomas Kerns McKnight, JD, CMB