One of the many uniqueness of a VA guaranteed loan is the possibility of buying a house and using some of the proceeds of the loan(s) to fix it up before you move in. The only other type of loan similar to this might be construction permanent financing (also guaranteed by the VA). In other words, the VA will under certain circumstances guaranty loans so you can purchase and rehabilitate (rehab) a house that needs repair and that you and the lender knew required repair before 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 the rehab work. That first loan will almost certainly require your house to appraise and pass inspection, even in its banged up state. In other words, the sink will need to have running water and the furnace will need to heat the house. You must coordinate the purchase and the rehab carefully with not only your lender but also with a licensed appraiser before you make any commitments. While this adds a level of complexity not normally found in residential mortgage lending, bear in mind that the United States Government is about to back the deal with a guaranty. Go for it!
Some Key Rules
It is important for you to know about some of the key rules established by the VA for this type of deal. The headings below have been changed to assist the reader and not all of the rules are restated here-just the ones that seem high profile.
A. VA may guarantee a loan for alteration and repair
o of a residence already owned by the veteran and occupied as a home, or
o made in conjunction with a purchase loan on the property.
B. The alterations and repairs must be those ordinarily found on similar property of comparable value in the community
C. The cost of alterations and repairs to structures may be included in a loan for the purchase of improved property to the extent that their value supports the loan amount.
D. A supplemental loan is a loan for the alteration, improvement, or repair of a residential property. The residential property must
o secure an existing VA-guaranteed loan, and
o be owned and occupied by the veteran, or the veteran will reoccupy upon completion of major alterations, repairs, or improvements.
E. The alterations, improvements, or repairs must
o be for the purpose of substantially protecting or improving the basic livability or utility of the property, and
o be restricted primarily to the maintenance, replacement, improvement or acquisition of real property, including fixtures.
F. Installation of features such as barbecue pits, swimming pools, etc., does not meet this requirement.
G. No more than 30 percent of the loan proceeds may be used for the maintenance, replacement, improvement, repair or acquisition of nonfixtures or quasi-fixtures such as refrigeration, cooking, washing, and heating equipment, and the equipment must be related to or supplement the principal alteration for which the loan is proposed
H. A supplemental loan will require the prior approval of VA if
o the loan will be made by a lender who is not the holder of the currently guaranteed obligation
o the loan is to be made by a lender that does not have authority to close loans on an automatic basis, or
An oblige liable on the currently outstanding obligation will be released from personal liability by operation of law or otherwise
If this type of deal sounds appealing, submit your application to your loan officer and carefully walk through a dress rehearsal with everyone involved including an appraiser and a home inspector who are licensed and know what they are doing. This is another of many ways to convert your VA loan guaranty to a ticket to higher net worth. It is among the ways to get the most bang for your buck.
Caveat: this is an opinion of the author and not to be relied upon 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