Can You Use a VA Loan for an Investment Property?
Explore the possibilities and limitations of using your VA loan benefit to acquire properties with rental income potential. Understand the nuances of this powerful benefit.
The VA home loan program offers a significant benefit to eligible service members, veterans, and surviving spouses, facilitating homeownership with favorable terms. While the VA loan is not designed for purchasing properties purely for investment, certain scenarios allow for the acquisition of a property that can also generate rental income. This involves understanding specific program guidelines that balance the primary purpose of the loan with opportunities for financial benefit.
Understanding VA Loan Occupancy Rules
A fundamental requirement for a VA loan is that the borrower must intend to occupy the property as their primary residence. This means the home purchased with a VA loan needs to be the place where the borrower lives most of the time. The intention behind this rule is to support homeownership for eligible individuals, rather than facilitating commercial investment ventures.
A borrower is typically expected to move into the home within 60 days of the loan closing. There are, however, exceptions to this 60-day rule, particularly for active-duty service members who might be deployed or temporarily stationed elsewhere. In such cases, a spouse or dependent can fulfill the occupancy requirement, or an extension may be granted if the home needs repairs before move-in. The VA expects the property to remain the primary residence for a reasonable period. After this initial period, if circumstances change, such as a relocation or deployment, renting out the property may become an option, provided the original intent was owner-occupancy.
Purchasing Multi-Unit Properties
A specific avenue for combining VA loan benefits with potential rental income involves purchasing multi-unit properties. The VA loan can be utilized to acquire a property with up to four units, provided the veteran occupies one of the units as their primary residence. This arrangement allows the borrower to live in one unit while renting out the others, which can help offset housing costs or generate additional income.
Lenders may consider potential rental income from the non-occupied units when qualifying a borrower for the loan. This rental income is typically factored in to account for potential vacancies and expenses. Even without considering rental income for qualification, a multi-unit property remains an option if the borrower’s income alone supports the mortgage.
Using Remaining VA Loan Entitlement
Veterans can use remaining VA loan entitlement for subsequent home acquisitions. Entitlement refers to the amount the Department of Veterans Affairs guarantees to lenders on a borrower’s loan. Full entitlement typically means there is no limit on the loan amount the VA will guarantee without a down payment, limited only by the borrower’s financial qualification.
Entitlement can be restored for future use under specific conditions. The most common way is by selling the property purchased with a VA loan and fully paying off that loan. Another option is a one-time restoration if the previous VA loan has been paid in full but the property is retained. Additionally, refinancing a VA loan into a non-VA loan, such as a conventional or FHA mortgage, can also free up entitlement for reuse. Regardless of entitlement restoration, the primary occupancy requirement still applies to any new property purchased with a VA loan.
Eligible Property Types and Loan Amounts
The VA loan program is flexible regarding the types of properties that can be financed. Eligible properties include single-family homes, multi-unit properties with up to four units, condominiums, and townhouses. Manufactured and modular homes can also be eligible, provided they meet specific VA requirements, such as being permanently affixed to a foundation and adhering to certain construction standards.
VA loans do not have a hard cap on the amount that can be borrowed for eligible veterans with full entitlement. For these borrowers, the VA guarantees up to 25% of the loan amount, allowing for significant purchasing power without a down payment, limited only by the lender’s qualification criteria. However, if a veteran has partial entitlement, loan limits may apply, often corresponding to conforming loan limits in their county. In such cases, if the desired loan amount exceeds these limits, a down payment may be required for the difference.