"Can a VA Supplemental Loan Pay for Repairs? What It Covers and the 30 Percent Limit"

You bought the home with your VA loan a few years ago, and it has been good to you. Then a spring storm pulled a section of shingles loose, and a slow leak worked its way down into the kitchen ceiling. The roofer's estimate is on the counter now, next to a second one for the ceiling, the subfloor and the cabinets that took the water. You'd like to fix all of it properly, and you'd rather not touch the rate on the VA loan you already have.

A VA supplemental loan pays for repairs, alterations or improvements to a home that already secures your VA loan, as long as you own it and live in it, or will move back in once major work is finished. The work has to protect or improve the home's basic livability or utility, and no more than 30 percent of the money can go to equipment like appliances.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, NMLS #483943, through C2 Financial Corporation, and licensed in fifteen states. I wrote this for you if you already have a VA loan and the home needs work. Every rule below comes from VA's Lenders Handbook, Chapter 7, Topic 5, titled "What is a Supplemental Loan" and last changed March 11, 2019.

What is a VA supplemental loan?

VA defines it in one sentence: a supplemental loan is "a loan for the alteration, improvement, or repair of a residential property." It is a VA loan for work on the home, and it goes on top of the VA loan you already have.

Two conditions come with it. The home has to secure an existing VA-guaranteed loan that is still open, and you have to own the home and live in it. The handbook also covers the case where you are out of the home for a while. It allows the loan if you "will reoccupy upon completion of major alterations, repairs, or improvements," so if a big repair means you have to stay somewhere else while the work is done, that does not rule you out.

If you'd like a refresher, VA loan eligibility and entitlement basics are on the VA loan page.

What can a VA supplemental loan pay for?

VA sets two tests for the work, and both have to be met. The work has to "be for the purpose of substantially protecting or improving the basic livability, or utility of the property." It also has to be "restricted primarily to the maintenance, replacement, improvement or acquisition of real property, including fixtures."

In everyday terms, the first test asks whether the work keeps the home sound or makes it work better as a place to live. Fixing a leaking roof or a water-damaged floor is the kind of work that test points to, and your lender applies it to your own project. The second test asks whether the money is going mostly into the home itself and the things attached to it, which is what real property and fixtures mean.

The handbook also names what does not qualify: "Installation of features such as barbecue pits, swimming pools, etc., does not meet this requirement." A pool can still be a good idea for your family, and it would be paid for some other way.

The 30 percent limit on appliances and equipment

The handbook puts a ceiling on equipment: "No more than 30 percent of the loan proceeds may be used for the maintenance, replacement, improvement, repair, or acquisition of non-fixtures or quasi-fixtures such as refrigeration, cooking, washing, and heating equipment."

So a new refrigerator, a range or a washer can be part of the loan, as long as that kind of equipment stays within 30 percent of the money.

There is a second condition in the same rule. The equipment "must be related to or supplement the principal alteration for which the loan is proposed." A new range makes sense inside a kitchen that is being rebuilt after water damage, but a range bought on its own, with no kitchen work around it, does not fit the way VA describes the loan.

It helps to have each contractor list the equipment separately from the construction in the bid, so you and your lender can see its share at a glance.

The lien on your home, and how long a VA supplemental loan can run

The lender is responsible for getting a lien in the position VA requires. VA lists four ways a supplemental loan can be secured:

• Through a clause in the mortgage or deed of trust you signed for your existing loan that lets more money be added later, if yours has one
• Through an amendment to the mortgage or deed of trust on your existing loan
• With a new lien that covers both the existing loan and the supplemental loan
• With a separate lien immediately behind the existing one

The right method depends on the documents on your current loan and on the lender, and you don't have to pick it. It is still worth asking about, because it decides whether the new money is added under the lien you already have, under one new lien that covers both loans, or under a second lien of its own.

The maximum term is 30 years if the loan is amortized, meaning it pays down over time with regular payments. If it is not amortized, the maximum term is 5 years.

Your existing VA loan and its rate

VA protects the loan you already have in two ways. First, "the making of a supplemental loan can never result in any increase in the rate of interest on the existing loan." If your current VA loan has a rate you like, the supplemental loan cannot change it.

Second, if the supplemental loan carries a higher rate than your existing loan, it has to be written on its own separate note, so the higher rate stays with the new money.

Your existing loan also has to be in good standing. The handbook requires it to be current on taxes, insurance and payments, and not otherwise in default. There is one exception. The loan can be behind if a primary purpose of the supplemental loan is to improve your ability to keep up with the loan.

Inspections, value and the $3,500 line

The lender sends VA a statement describing the work, and at closing it reports how much you still owe on your existing loan. The value side depends on the cost of the work.

Cost of the repairs, alterations or improvements	What VA requires
More than $3,500	A Notice of Value, the document that states the home's reasonable value, plus compliance inspections
$3,500 or less	A statement of reasonable value signed by a VA-designated appraiser, plus a certification from the lender

For the smaller jobs, the statement lists the work, its cost, and that the cost does not exceed the reasonable value. A VA-designated appraiser is a person the lender nominates and the local VA office approves. In place of VA's compliance inspections, the lender certifies that a qualified person it designated inspected the work and that it appears to match the contracts.

VA's prior approval is required in two cases. The first is when VA has not given the lender authority to close VA loans on its own, so VA has to sign off before the loan closes. The second is when somebody liable on the existing loan will be released from personal liability.

Entitlement, and why the company holding your loan matters

Your entitlement is the amount of your VA benefit available for use on a loan, and VA's guaranty on a loan is limited to the entitlement you have available. The guide to getting a second VA loan while keeping your first home explains it in more detail. For a supplemental loan, the handbook gives two paths, and which one you are on depends on whether the new loan is combined with your existing one.

If the supplemental loan stays separate from your existing VA loan, you need enough entitlement for the new loan. VA then issues a new loan guaranty certificate just for the supplemental loan.

If the supplemental loan is consolidated with your existing VA loan, VA issues a modified guaranty certificate covering the combined loan. The handbook walks the lender through the calculation step by step in its Table 9. It blends the amount VA guarantees on your existing balance with the amount VA would guarantee on the supplemental loan by itself.

The handbook also covers the case where you have no entitlement left. VA can still guarantee the supplemental loan, provided the lender is the holder of your existing loan and the two loans are consolidated. If your entitlement is fully used, the company that holds your current VA loan is the first call to make.

How to get a VA supplemental loan

The work moves through roughly these stages, and I'll walk you through each one if we work on it together.

1. You get written bids. Each one describes the repairs and their cost, with any appliances or equipment on their own lines.
2. You ask whether the lender makes VA supplemental loans. That is worth asking up front. If your entitlement is used up, the holder of your current loan is the one to ask.
3. The lender confirms your existing loan is in good standing on payments, taxes and insurance.
4. The value is set under the $3,500 rule above.
5. The lien and term are settled, with VA's prior approval if the file needs it.
6. The loan closes, and the lender reports your existing balance to VA.

When you're ready, please provide the signed contract or written bid from each contractor, all pages, showing every repair and its cost. Please also provide your most recent mortgage statement on your current VA loan, all pages, please. We will need those to show the cost of the work, the balance on your existing loan and that your payments are current.

Details that keep a VA supplemental loan on track

• Keeping the equipment on its own lines in the bid makes the 30 percent share easy to confirm.
• Leaving pools, barbecue pits and similar features out of the scope keeps the project inside what VA allows.
• Knowing who holds your current loan helps if your entitlement is used up, because that company is the one that can consolidate the loans.

If the work is mostly about energy, such as insulation, storm windows or a heat pump, the VA energy efficient mortgage is a separate VA tool with its own limits, built into a purchase or a refinance. If you are buying a farm and the farm residence needs work, what a VA loan covers on a farm residence explains that the loan can repair or improve the residence too.

An example, with invented numbers

Numbers below are made up to show the mechanism. They are not a quote, and they are not anyone's real file.

Say the storm damage in the opening needs a new roof, a new kitchen ceiling, new subfloor and replacement cabinets. The water also ruined the range and refrigerator, so those are part of the same kitchen repair.

Roof, ceiling, subfloor and cabinets    $17,800
Range and refrigerator                    $4,200
                                        -------
Supplemental loan for the work           $22,000

30 percent ceiling for equipment          $6,600
Equipment in this plan                    $4,200

The equipment comes to $4,200, under the $6,600 ceiling, and it is part of the kitchen repair, so it fits VA's rule. The work costs more than $3,500, so VA requires a Notice of Value and compliance inspections. Your current rate stays the same, and if the supplemental loan carries a higher rate, it goes on its own note.

Now say the plan also included a $9,000 above-ground pool. That piece would come out of the loan entirely, because VA names swimming pools as work that does not qualify.

Common questions

What is a VA supplemental loan?

A VA supplemental loan is a VA loan for the alteration, improvement or repair of a home that already secures your existing VA-guaranteed loan. You have to own the home and live in it, or plan to move back in once major work is finished.

Can I use a VA supplemental loan for a swimming pool?

No. VA's handbook says that "installation of features such as barbecue pits, swimming pools, etc., does not meet this requirement." The work has to substantially protect or improve the home's basic livability or utility.

What is the 30 percent rule on a VA supplemental loan?

No more than 30 percent of a VA supplemental loan can be used for non-fixtures or quasi-fixtures, which VA describes as refrigeration, cooking, washing and heating equipment. That equipment also has to relate to or supplement the main alteration the loan is for. A new range inside a kitchen repair fits, for example.

Will a VA supplemental loan raise the rate on my existing VA loan?

No. VA says making a supplemental loan can never increase the interest rate on your existing loan. If the supplemental loan has a higher rate than your existing loan, it must be written on a separate note.

Do I need entitlement left for a VA supplemental loan?

If the supplemental loan stays separate from your existing loan, you need enough entitlement for it. If you have no entitlement left, VA can still guarantee the supplemental loan when the lender holds your existing VA loan and the two loans are consolidated.

How long can a VA supplemental loan last?

The maximum term is 30 years if the loan is amortized, meaning it pays down with regular payments over time. If it is not amortized, the maximum term is 5 years.

Your next step

If your home needs work and you'd like to figure out whether a supplemental loan fits, you are welcome to call me. We can go through your bids, the 30 percent share, and the questions worth asking the company that holds your current VA loan. Supplemental loans aren't priced in the tool on the homepage, so a conversation is the right place to start. I'm licensed in fifteen states, and if your home is in one of them, I'd be glad to help.

A supplemental loan is one way to pay for repairs, and there are others. If you are weighing a refinance instead, the difference between a rate-and-term refinance and a cash-out refinance is laid out on its own page. If the home is in South Carolina, my South Carolina VA loan page covers what is different about a VA file here.

Nothing here is a loan approval, a denial, or a commitment to lend. VA Pamphlet 26-7 is the authority, and your lender applies it to your own file.