Using the VA Renovation Loan

*Note from David* This is a guest post from Cathleen Hutch, a member of the Military Millionaire Community, who when asked how people could contact her said “have them join the FB group (the above link) and message me, haha.

Lessons learned using the VA renovation loan:

So we decided to buy a new house earlier this year, during a pandemic and super-hot housing market. Originally, we expected to use a VA home loan, but we were finding that homes that would typically appraise without issue were selling for $100-150k over asking. Yes, that’s not a type-o. That’s $100,000, with a comma. FML.

We did find a Fixer Upper that was languishing on the market, within our budget, that had 0 offers in 3+ weeks on the market. The capital F and U were intentional- there’s a lot of work to be done. The inspection went as expected, but we waited with bated breath for the VA appraisal to come back. Which it did- over the agreed-upon sale price. Problem is, the appraiser amended their appraisal to be “subject to” certain repairs. Um…what?

This meant that the loan wouldn’t be funded unless these items were repaired. Unfortunately, these repairs included window frame replacement, repairing a hole in the floor, a new roof (only a few small trees growing out of the roof, come on!), and railing repair. Not unfixable things, but certainly things that would take a few months to schedule.

Enter a changeover to a VA renovation home loan. This was handled by a different department than the original VA mortgage broker and was about as fun to go through as a roller coaster ride for someone afraid of heights. It has just about as many ups and downs, too.

Using the VA Renovation Loan

Top 15 lessons learned

Why didn’t anyone tell me about this junk before?

1. Find out what limits our lender has for renovation costs:

We bumped up above the limits that the lender I worked with had. However, my loan officer was able to successfully argue that ours was a special circumstance since we lived in an extremely high cost of living area, and the repair amount was a very low fraction of the value of the home.

2. Find out what can and cannot be part of the renovation loans

There is some work that the lenders may not allow to be part of the loan. In this case, my lender wouldn’t lend on structural repairs. Luckily, the structure was pretty solid, as was most of the plumbing and electric. It was just that pesky roof-top garden that was at issue.

3. Get multiple bids from licensed contractors for the work at the same time.

We did not do this. That was stupid. And not for the reason most people get multiple bids- we weren’t looking for the cheapest bid. We used recommended people, but the first one couldn’t get permission to use a partner’s contractor’s license, which delayed us by 2 weeks to get a new roofing quote. Not only that, we had a 2-3 week long tiff with the roofing contractors on getting them to sign required documents, break down the bid between material and labor costs (see #7), and them requiring an immediate material deposit. The general contractor was slow on doing paperwork. These time delays significantly delayed processing the loan paperwork.

Back to the “licensed contractor” thing: In our area, roofers do not need contractor licenses. However, the VA requires all work be done by licensed contractors. The first roofer would use someone else’s license and have them oversee the project if a GC was needed. This is not tenable if something doesn’t check out. Make sure you’ve got people that have their own contractors license.

4. Get their email and phone contact info.

This is extremely important. I had gotten a referral from another contractor that I know and trust- but didn’t get the actual contractor’s contact information, so was having to do phone tag to get anything done. I should have gotten their contact information and email. Also important was their working hours and best time to call them. Remember, they are most likely on a job somewhere, and don’t have time to be taking a phone call in the middle of installing cabinets.

5. Make clear my deadline to get a completed quote (this should be a few days, not weeks)

We needed a written quote with their company letterhead to send to the lender. However, contractors are quite busy, and could take a few weeks (as happened to me) to get a bid to you. Had I told my contractors my tight time schedule, I would have gotten the bids in a more timely fashion.

6. Check the bids to make sure it’s got everything required.

So I didn’t check the GC’s carpentry bid to make sure all the required elements were on it. There were two main items that were not on the bid- and we had to go back and get a second bid, which took more time. This also goes back to having them work on the bid in a timely fashion, and provide them an exact list of work to be done, so they can get accurate and complete bids.

7. Get one company to do everything

The number of draws may be limited.

The 3 draws we were allowed had to be broken up between the two. Also please note, my lender did not permit a materials draw before work began. I had a brief (ok 2 week) argument with the roofing contractor about paying for material upfront. I understand that material costs money- so I ended up paying a material down payment myself first, and where the draw will be reduced by that amount. If you do go this route, I strongly recommend getting a receipt from the company for the material down payment, and inform your lender that you’ve had to do so- this way you don’t pay double for the deposit.

8. Bids may have to separate material and labor costs

In the case of our roofing contractor, they refused to break down the material vs labor costs, which resulted in yet more delays. We (and by “we” I mean my loan officer) finally got the head underwriter to agree to accept the bid from the roofing contractor without the breakdown.

However, this was a HUGE exception. And the refusal on the roofing contractor’s side to not break down the material costs made no sense, and they were also demanding an immediate 50% deposit of the total cost to “cover the materials”. Logically, this would mean that it’s 50-50 for material and labor, no? In this case, they refused to put that down on paper. In the case of my GC, he was cool with it, but it did take a few more days to separate them out. Long painful story short: make sure the bids are broken down between labor and material costs.

9. Make sure the contractors have paperwork readily available

    1. Insurance
    2. Contractors license
    3. List of previous jobs in the last 12 months (description, location, scope)
    4. Registered as a vendor with VA- this was over looked when we started the process, and didn’t get caught until the very end. While they do not need to be registered when you start, they damn sure have to be by the time your lender is ready to close. This delayed closing another 2 weeks for us.
    5. Be super polite to the contractors – if they’re busy, and don’t show up, you’re screwed

The approval process, as you can see from above, is long and surprisingly painful. Pretty sure giving birth without meds was less painful (Trust me, I did both. It took less time for me to give birth, and maybe was less painful).

10. Make sure contractors know the completion timeline

Usually it’s start within 30 days of closing, finish within 90 days. They need to be aware of this, so you and they aren’t caught off guard when the paperwork from the lender finally does come through and has this as part of the contract. While we didn’t have that problem, it probably could be a problem with contractors that are extremely busy.

11. Write out a list of everything needed

This succinct list would have been helpful to the contractor. Measurements of replacements would be even more helpful. Often you have to ask the sellers for permission to have your contractor show up, and you really don’t want to be irritating them more with extra visits.

12. Its gonna take a fuck long time to close

Usually, closing is 30-45 days, right? In the case of a renovation loan, it could take a much longer time. Nothing can proceed until everything is in place- all the paperwork, bids, approvals, and appraisals. Most of which is out of your, the buyers, hands. We were in escrow from the end of May until the beginning of October. That’s a little over 4 months!

13. Stay on top of responses from contractors

Timing is critical, and quick responses are necessary to close even close to on time.

Make sure contractors are responding to your lender’s requests. These are non-negotiable, and need to be done. I had to talk to the receptionist for the roofing contractor, because the estimator wasn’t returning my phone calls. You probably need to be persistent, but polite, if the contractors are taking their time. Give them a few days, but not a few weeks, to respond.

14. Talk to your loan officer

They are really good at knowing the timeline, and what’s required. They can also be your advocate to talk to the seller or their agent to explain delays. Mine did this, and I stacked the decks and wrote a letter directly to the seller to explain the delays and apologize.

15. You’re going to have to wait for a re-appraisal

Based on the after-repair value, which can take a few weeks (and by a few I mean at least 2, plus a few grey hairs)

Once we had all the bids in, and the contractors approved, we had to get the VA appraiser to re-appraise the house with the after-repair value. While this seemed simple enough, especially considering that the appraiser just came back with a value rounded to the closest $1000 of the quoted amount for repair, it took over a week to get.

After all this, and an abundance of patience on the seller’s side, we closed. Finally. Then was coordination of the repair before we occupied the house. Luckily, we had a bit of an overlap before we had to be out of our old house. So we used this time and scheduled the general contractor to do some of the necessary safety repairs. We also lucked out that he happened to have an opening a few days after closing-so the extra delays helped us out there.

If you are going through the VA renovation loan process, I hope this list of lessons learned helps you. Remember: things might be different with your lender or the area you are living in.

Did I miss anything?

Here’s my experience with the draw process. It’s much smoother, in my opinion.

Once the loan closes:

  1. Inspection to release funds is scheduled right after (usually the business day after) you send signed draw request- they need a way for the inspector to access the property. The draw request is requesting money to be released to the contractor from the escrowed repair funds.
  2. Keep email/contact forms for change order requests- we had to put in change order requests and have them approved prior to sending a draw request. This took us only a day or two for the general contractor’s changes.
  3. Make it easy for the inspector to take pictures/ view the repairs- the inspector had to take pictures of all of the repairs to file the paperwork.
  4. Keep a list of completed repairs for the inspector to review
  5. Communicate with the contractors about the inspection and draw request process
  6. Monitor the mail, because the check is sent to us (the borrowers) to be cross-signed. You might have to check with your lender about the actual process for this, as it might be different than what we did.

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