For qualified homebuyers, Department of Veterans Affairs (VA) loans present an alluring mortgage financing choice. If you meet specific eligibility requirements for a VA loan, you can benefit from lower mortgage rates, limited closing costs, and little to no down payment if you are an active-duty military member, veteran, or survivor of a spouse.
But if you’re wondering if you can buy an investment property with a VA loan, VA occupancy requirements might be a barrier. VA loans have more stringent occupancy requirements than other kinds of home loans.
For instance, following the investment purchase, the majority of VA lenders require borrowers to occupy the property as their primary residence for a minimum of 12 months. Naturally, if you have a primary residence somewhere else and must remain there, that’s probably easier said than done.
However, if you finance with a VA mortgage, you might still be able to earn rental income or a return on your investment.
Griffin Funding is dedicated to providing our veterans with unparalleled service and the most favorable terms.
Although the VA has occupancy requirements, as previously mentioned, this does not preclude you from investing in rental property. But first, you must confirm you’re eligible for the loan.
Borrowers must fulfill the minimum service requirements established by the Department of Veterans Affairs (VA) as well as the particular credit and income requirements set by the lender in order to be eligible for a VA loan.
You must have served 90 straight days during a war or 181 days during a peacetime in order to fulfill the minimum service requirements. Additional requirements will also apply to members of the National Guard and Reserves and surviving spouses. If you were discharged due to a hardship or a medical condition, you might still be eligible for a VA loan even if you don’t meet the minimum service requirements.
Lenders require a certificate of eligibility (COE) in order to confirm your eligibility. A COE can be obtained directly from the VA or through your lender. This document notifies the lender that you are eligible for VA benefits, enabling them to begin the loan approval process.
Once your lender has your COE, they must make sure you satisfy their minimal requirements for eligibility, which are as follows:
Regardless of the kind of loan you apply for, lenders look at your credit score to make sure you have a history of making timely debt repayments.
Lender requirements for VA loans differ, but generally speaking, they are less stringent than those for conventional loans, providing veterans with more leeway. For instance, Griffin Funding demands a credit score of 500 for VA loan borrowers, whereas the majority of lenders require a minimum score of 620.
Nevertheless, a higher credit score can result in lower VA interest rates. Consequently, this decreases the overall cost of the loan and your monthly mortgage premiums; therefore, we advise raising your credit score prior to submitting an application for a home loan.
Your income guarantees the lender that you make enough money each month to repay the loan. To confirm your income, lenders may examine your bank statements, pay stubs, and tax returns.
To make sure you can afford to repay the loan after paying off all of your other debts, including student loans, auto loans, and other mortgages, your income will be compared to your debts.
Your monthly debts divided by your gross monthly income yields your debt-to-income (DTI) ratio, which is expressed as a percentage. While lenders only require a DTI of no more than 2036 for conventional loans, some will go as high as 2043 percent.
With VA borrowers, lenders may be more accommodating, allowing them to have DTIs as high as 255%, depending on specific circumstances such as high credit scores and whether or not they are willing to make a down payment.
To guarantee the safety of the home and prevent borrowers from drastically overpaying for a specific property, the VA requires an appraisal in addition to your lender’s loan requirements and the minimum service requirement.
How VA loans work
Department of Veterans Affairs does not issue VA loans; if you default on the loan, the lender will receive 25% of the total loan value. Otherwise, the department will only return the loans.
Thus, in order to benefit from this offer, you will need to locate a lender that offers VA loans. The VA is in charge of deciding who is eligible for a loan, and there are various VA loan options.
Because VA loans are regarded as non-conforming, lenders are able to offer qualified borrowers greater latitude and flexibility. They have several advantages over conventional rates, including:
Can you use a VA loan for investment property?
You may be wondering if you can use VA loans for investment properties now that you know how they operate and who is eligible.
VA loans are available for investment properties; however, there are certain restrictions. For instance, VA loans are only available for primary residences; however, since the VA permits a number of exceptions, there are ways to use them for rental properties. Additionally, there could be a number of difficulties when using your VA loan for investment property.
You have to fulfill the VA’s occupancy requirements in order to use a VA loan for an investment property. These stipulate that you must live in the home for at least 12 months, move in within 60 days of closing, and use the property as your primary residence.
In addition, a property must be zoned for residential use in order to be purchased with a VA loan. Consider the following types of properties:
You can rent out a bedroom in your house if it’s big enough as long as you stay there. You can use this kind of real estate investing, sometimes referred to as “house hacking,” to help pay off your mortgage because you can charge rent to your tenants.
Also, as long as you continue to reside in the house, there are no restrictions on the number of rooms you can rent. The benefits of house hacking include the following:
- Extra income
- Building equity faster
- Tax benefits like deductions for the cost of repairs
If you live in one of the units, you can use a VA loan to buy multi-family homes or multi-unit properties.
Once more, you can use your VA loan to buy an investment property, enabling you to rent out as many rooms or units as you like, provided you also live there.
There is a restriction when using your VA loan to buy multi-unit properties: the maximum number of units allowed is four. Therefore, you can’t purchase an entire apartment complex. Rather, you can only rent smaller buildings that can accommodate three people.
Commercial real estate cannot be purchased with a VA loan since it is not a primary residence.
You won’t be eligible for the loan if any commercial buildings don’t meet the VA’s occupancy requirements.
Mixed-use property is a building considered both residential and commercial. For the purpose of purchasing a mixed-use property with a VA loan, the commercial space can accommodate more than 25% of the home’s space.
Similar to the other properties, the building’s maximum number of units is four. Additionally, the VA must guarantee that the property is used as a residence for the duration of the loan.
Another difficulty when using a VA loan for investment property is rental income.
Rent revenue can assist you in meeting the income requirements set out by your lender in order to be eligible for a VA loan. When you buy a single-family home with a rented room above the garage, for instance, the lender will take that into account when calculating your income.
Lenders typically take into account 25% of the rental income from a property when determining your income. Therefore, they will add $750 per month to the total amount of income you receive each year if the property has a rental unit that brings in $1,000.
Additionally, by lowering your DTI ratio, this rental income can increase your appeal to lenders. For instance, renting an apartment can raise your income and reduce your debt-to-income ratio (DTI) if you are unable to reduce your monthly obligations.
Additional requirements for a VA loan used for rental property may be specified by lenders. For example, in order to demonstrate monthly rental income earned and assist in establishing the fair market rent amount, they might demand that rental income be verifiable on bank statements.
Lenders have different policies regarding how much and how quickly they will approve your loan based on projected rental income. Because of this, not all lenders will take into account your potential rental income when evaluating your actual income; instead, they prefer to see the money you can be sure you will make in order to determine whether you can afford to return the loan.
The VA permits retiring veterans, borrowers who are deployed or have remote employment, and homeowners in need of repairs or renovations to be exempt from the occupancy requirement. Additionally, if your spouse resides in the house full-time, the VA may grant an exception.
Active duty military personnel will need to relocate because they are frequently transferred, but they are not required to sell their houses. For instance, if they are transferred or relocate, they are allowed to keep the house and rent it out as long as they have lived there for a minimum of one year. A borrower may request an exception to the occupancy rule from their loan officer and the VA if they haven’t lived in the house for a year.
Selling the house to an investor or other occupant is an additional choice. Because military personnel are frequently relocated, transfers occur frequently. Getting a new buyer to take over the loan is frequently the simplest course of action.
Refinancing with a VA Interest Rate Reduction Refinance Loan (IRRRL) is another way to get around the occupancy requirements. You can refinance your home while renting it to a tenant if you can convince your lender that you have lived in the property for at least a year, as opposed to them needing an occupancy certification.
It’s not required to refinance if you wish to rent out your house. Usually, all you need to do to resolve any possible residency issues is to discuss your situation with the VA.
Renting out your home may reduce your entitlement. First-time buyers are not subject to a loan cap, but there are restrictions on using your VA loan benefit for a second, third, or fourth time.
Based on the location and size of the first loan, the VA establishes a maximum size for your second loan. After repaying your initial VA loan, you can regain full eligibility and take out new loans with no maximum amount.
Selling your VA loan-financed home
Since all types of homes increase in value over time, they are all technically investment properties. Even though your VA home loan isn’t an investment loan intended only to support real estate investments, after you’ve lived in the house for a full year, you can sell it for a profit and use the proceeds to pay off the loan and reinstate your VA benefits.
House flippers frequently go through this process, but they complete it much faster because they are not constrained by the VA occupancy requirement. But after a year of occupancy, you can sell the house for a profit.
Investment property loan alternatives
There are very few circumstances in which it is feasible to use a VA loan for investment property.
For most borrowers, it is not worth it to use a VA loan for an investment property because the occupancy requirements require you to live in the home for a full year and use it as your primary residence.
Alternatively, you may want to think about a few different investment property loans, such as:
For those who already have a VA loan and own their primary residence, conventional loans are the best option. While conventional loans are more flexible and can be used to buy any kind of property, VA benefits cannot be used for investment property unless you plan to live there.
When applying for a traditional loan, you can anticipate making a down payment equal to 20% of the purchase price of the home (E2%80%99), but for investment properties, lenders may demand a down payment as high as 20% of the total amount. Furthermore, the requirements for conventional loans are more stringent regarding income and credit score, and your DTI is not adjusted for prospective future rental income.
Non-QM loans are better for people with less stable income who can still afford their monthly mortgage premiums because they are more flexible than conventional loans and can be qualified for using assets and bank statements rather than pay stubs and W2s.
Mortgage rates on non-QM loans for investment properties are typically lower than those on other loan categories, such as hard money loans, but higher than those on traditional conventional loans. Additionally, because their requirements are less strict, they provide a more efficient approval process.
Another kind of property investment loan is the DSCR loan, which enables you to be approved based on cash flow rather than personal income or employment history.
The approval of a DSCR loan is contingent upon your debt service coverage ratio (DSCR), which assesses your ability to repay the loan by contrasting your gross rental income with the amount of mortgage debt.
In general, you need more operating income to pay off your debts and cover supplemental costs like upkeep and repairs for rental properties if your DSCR is higher.
Applying for a VA loan
Thus, the answer to the question of whether you can use a VA loan for an investment property is yes, but you should be aware of the possible obstacles you may encounter, like restrictions on the number of units a property can have and occupancy requirements.
Recall that if you don’t plan to live there and can’t demonstrate that you have been there for at least 12 years prior to ceasing to use it as your primary residence, you cannot use your VA loan to buy investment property.
If you wish to rent out a room or unit in your house, though, or if you’re an eligible borrower looking to fund your private residence without renting it out, a VA loan might still be the best option for you.
Applying for a VA loan is easy and involves the following steps in either scenario.
Get your certificate of eligibility (COE) from the VA
Before submitting an application for a mortgage, you can verify your eligibility for a VA loan by obtaining your certificate of eligibility from the VA if you’re not sure if you qualify.
If you are eligible, your lender can request your COE from the VA on your behalf, which could expedite the process.
Lenders need the COE in order to assess if the VA will approve your loan application. Before speaking with a lender, you can obtain the COE on your own if you’re unsure of your eligibility and don’t want to apply for a loan until you’re certain.
Preapproval for a mortgage is essential at the start of the process because it can determine your eligibility for a loan and the maximum amount that a lender might be willing to offer.
Your home’s affordability can be ascertained through preapproval, enabling you to begin shopping within your means. Serious buyers with a preapproval letter are preferred by sellers.
A mortgage preapproval can give you an idea of how likely you are to be approved, but it doesn’t guarantee that you will be approved for the loan or a specific amount when the time comes to complete the full mortgage application.
Consequently, if a lender approves you for a lower amount than you were initially preapproved for, don’t be shocked, especially if your financial situation has changed. To ascertain how much you qualify for, the application approval process actually takes into account an appraisal and a particular property.
With a simple 10-step mortgage process, Griffin Funding strives to make applying and securing a home loan easy, transparent, and quick.
Possessing a preapproval can make you appear more desirable to sellers.
The home must meet the VA’s minimum property requirements to get approved for the loan. When you’ve found a home you like, you can make a purchase offer and allow the seller to accept, reject or counter.
Before you apply for the VA loan, your real estate agent or attorney can draft a sales contract once you’ve agreed on a price.
Following the signing of a sales agreement, you can apply for a VA loan through the lender of your choice, undergoing underwriting and appraisal.
Based on the lender’s requirements, an underwriter will confirm your eligibility for the loan by reviewing your financial data. In order to approve the home for purchase, the VA also conducts an appraisal at the same time.
You can lock in your interest rate and close as soon as the house passes the VA’s appraisal and your loan application is approved. This means paying closing costs, including your VA funding fee.
Even though the kinds of properties you can finance with a VA loan are restricted, there are still a number of other VA loan options that are well worth taking into account, particularly if you already have one.
Griffin Funding provides the following options for refinancing VA loans in addition to purchase loans:
You can refinance your home and use the equity as cash by using a VA cash-out refinance loan, which increases your access to funds for major purchases or debt repayment.
What you can do with a VA cash-out refinance is restricted by the VA. It cannot be used, for instance, to finance an investment property.
You can refinance your current home loan with a VA streamline refinance loan, also known as an IRRRL. You can get a lower interest rate and monthly payment by refinancing your home loan.
Getting a VA loan
For qualified borrowers who wish to forego a sizable down payment and PMI, a VA loan is an enticing offer.
In the end, the kind of property determines whether to use a VA loan for an investment property. You must also adhere to the VA’s occupancy requirements.
To lower your mortgage payments, you might be able to use a VA loan for rental properties with up to four units and a home hack. If you have any questions, you can speak with your loan officer or the VA as they permit certain exceptions.
Are you prepared to buy a property with a VA loan? Request a quick quote now.
- Chapter 12 Minimum Property Requirement Overview – Veterans Affairs. https://www.benefits.va.gov/WARMS/docs/admin26/m26-07/Ch12_Minimum_Property_Requirement_NEW.pdf.
FAQ
Can you use a VA as an investment property?
The good news is that you can use the benefits of your VA home loan to purchase a duplex, triplex, or fourplex. However, one unit must be your primary residence, and the purchased property cannot be used exclusively for investment or rental purposes. Get Started with Your Multiunit VA Home Loan.
Can you turn a VA loan into a rental property?
VA occupancy requirements state that the buyer must occupy the property within 60 days and use it as their primary residence. Can I rent out my VA loan home after a year? Homeowners typically anticipate being in their properties for a minimum of a year. The house may be rented out after a year.
Can I assume a VA loan as an investment property?
One to four unit properties can be purchased with a VA loan: duplex, triplex, quadplex, or single-unit properties. Your best option if you’re looking to purchase an investment property with a VA loan is a duplex or other type of multifamily home.
What property Cannot be financed with a VA loan?
Vacant land is not eligible for VA financing. Even if you intend to build a house on the land in the future, you cannot buy a plot of land with a VA loan. To use a VA loan for land purchase, the property must be developed as a primary residence right away.
Read More :
https://www.veteransunited.com/valoans/va-loan-for-investment-property/