VA loans can be used to buy more than a single-family property. Even though it’s an owner-occupied program only, you can use the program to buy a 1-4 family unit. The only catch is that you must live in one of the units yourself as your owner-occupied property.
What if you want to buy a multi-unit property that needs work? Maybe it doesn’t even pass the VA appraisal? Is it possible?
The VA Renovation Loan
Yes, the VA does allow you the option to purchase a multi-unit property and fix it up with the proceeds of the loan. The VA allows you to borrow the lesser of the total of the purchase price plus the cost to fix up the home or 100% of the future value of the units after renovation.
While this sounds like a great plan, you may have a hard time finding a willing VA lender. The VA doesn’t fund the loan – that’s the VA lender’s job. This means that the VA lender takes the largest risk. While the loan is guaranteed by the VA, assuming you have enough entitlement, many VA lenders may hesitate to provide a loan such as this.
How the VA Renovation Loan Works
If you find a willing VA lender, they will provide you with enough funds to purchase and fix up the property, as long as you qualify for the loan. Just like a standard VA loan, you’ll need a 620 credit score, a maximum 41% – 43% debt ratio, and enough money left over at the end of the month to cover the daily cost of living.
Some lenders may also add their own requirements on top of this to make sure that you are a good risk. Once a lender decides you qualify, they will underwrite, close, and fund the loan. They will pay the seller as they would in a standard purchase. The remaining funds left after paying the seller then go into an escrow account. The lender disburses these funds as they see fit.
Typically, the lender and the contractor will come to an agreement before you close on the loan. This agreement will determine when each phase of the work will be done and how much money the lender will pay the contractor for the work. The final disbursement will not be made until the lender determines that all work has been completed successfully.
What Will the VA Loan Cover?
The VA renovation loan can help you get the property up to VA code. This is especially important if the property didn’t pass the VA appraisal. Typically, you can’t get a VA loan on a property unless it meets the Minimum property requirements that the VA has in place. If the property doesn’t meet these requirements, you must use the funds from the VA Renovation Loan to bring it up to code.
If there are any other funds left, you may be able to use them to make other renovations. Just keep in mind, that the VA doesn’t fund any luxurious renovations. For example, you can make structural changes, including knocking down or adding walls. You can also add or remove rooms. You can even make cosmetic changes to a home, as long as they add value to the home. Just keep in mind that any major structural changes that you make to the home must leave the foundation alone.
The lender is going to pay close attention to the plans and make sure that any changes that you make are worth the cost. In other words, do the changes have an effect on the home’s value? If they don’t, you may not be able to do them.
The hardest part of using the VA renovation loan to buy and renovate a multi-unit property is finding a willing lender. You may be better off using a mortgage broker that has relationships with many VA lenders. You may increase your chances of finding a willing VA lender to do the job for you.