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Can VA Buyers Borrow More Than a Home Is Worth?

It's tough to find a home in mint condition, unless you're buying sparkling, brand new construction. There's often a host of upgrades, fixes or improvements that prospective homebuyers envision making once that property is all theirs.

Many first-time homebuyers expect to be able to build the cost of those improvements and upgrades into their new home loan. Unfortunately, making that work in practice is tough with a VA mortgage. In fact, only certain energy-efficiency improvements can be added to the loan amount, along with acceptable costs and fees.

So, yes, it's possible to borrow more than your home is worth. But it's a question of what that additional funding will cover.

Let's take a closer look.

Establishing Value

The appraisal process is a big part of the homebuying journey. That's especially true for the VA's unique appraisal process, which puts a premium on a property's safety and marketability.

The VA appraisal accomplishes a couple key things. One is to generate a fair market value for the home you hope to purchase. Needless to say, that's a pretty important detail, and here's why: VA lenders are going to lend whichever is less between the purchase price and the appraised value.

For example, let's say you come to terms with a seller and agree to buy their home for $175,000. Then, a week later, the VA appraisal indicates the home's current value is only $150,000. Mortgage lenders aren't in the habit of paying more for homes than they're worth, which means you'll either need to renegotiate with the seller, cover the difference in cash or walk away from the deal.

On the flip side, if you're under contract for $175,000 and the home appraises for $200,000, then the lender isn't simply going to fork over an additional $25,000. They'll finance the home at the agreed-upon price.

Adding Money for Rehab?

The lesser of the purchase price and the appraised value of the home represents a ceiling that VA homebuyers can exceed only for certain things. Those things do not include retrofitting a kitchen, adding a pool, upgrading a master bedroom or installing a new roof. You typically won't be able to tack on an extra $10,000 or $30,000 to make repairs or improvements that fall outside the scope of acceptable energy-efficient upgrades. The VA does technically allow for a "rehab" or "renovation" type loan, but it's difficult to find lenders that actually make these loans.

Military borrowers hoping to get a home loan that includes money for rehab work can look into the FHA 203k program or lenders that offer this particular type of conventional financing. These types of loans will allow qualified homebuyers to borrow an amount that reflects what the home will likely be worth once all the improvements are made.

FHA and conventional loans do come with down payment requirements and forms of mortgage insurance, neither of which VA loans require. That's part of the tradeoff for the ability to secure a rehab-focused home loan.

What Can You Finance?

So what kinds of costs can you add to your VA home loan?

Some energy efficiency improvements, for one. Things like solar heating or thermal windows will work, but something like a heated swimming pool or energy-rated appliances won't. Qualified VA borrowers can seek to add up to $6,000 in qualified energy efficient improvements.

You can check out our overview of the VA Energy Efficient Mortgage program for more information.

Borrowers can also roll the VA Funding Fee into their loan. This fee, which is applied by the VA to all purchase and refinance loans, goes directly to the government and helps keep the VA loan program going for future generations. Borrowers with a service-connected disability are exempt from paying this.

VA homeowners seeking an Interest Rate Reduction Refinance Loan (IRRRL), also known as a VA Streamline refinance, may be able to finance discount points as well. A discount point represents 1 percent of the loan amount and can be used to "buy down" an interest rate.

More VA loan questions or want to get a sense of your purchasing power?

Talk with a Veterans United loan specialist at 855-870-8845 or get started online today.

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