How To Use A VA Loan For Your Rental Property Or Other Real Estate Investment
Department of Veterans Affairs (VA) loans are an attractive mortgage financing option for qualifying home buyers. If you’re an active-duty military member, a veteran or a surviving spouse, you may enjoy lower mortgage rates, limited closing costs and little to no down payment. VA loans also don’t come with mortgage insurance (although you will be required to pay the VA funding fee).
However, VA loans are stricter than other types of home loans when it comes to occupancy requirements. For example, under most circumstances, you must move into your new home within 60 days of closing. Even though the VA doesn’t have a specific guideline for how long you must reside in your home, most VA lenders intend for you to use the property as your primary residence for at least 12 months.
If you’re wondering whether you can use your VA loan to purchase an investment property, the VA occupancy requirements will definitely present an obstacle to those plans. However, it may still be possible to generate rental income or get a return on your investment when you finance with a VA mortgage.
Can You Use A VA Loan For An Investment Property?
While the VA loan program offers more relaxed borrowing qualifications than conventional loans, VA loan occupancy requirements specify that you must use the home or property you’re purchasing as your primary residence. As such, you won’t be able to use your VA loan to purchase a rental property, vacation home or other investment – at least not directly.
While you can’t purchase a house with the intention of renting the property, you do have some options for using your primary residence to generate rental income.
How To Use A VA Loan For Your Rental Or Investment Property
Follow the steps and tips below to get your primary residence pulling double duty as a real estate investment property.
1. Make Sure You Meet Eligibility Requirements
The first step you’ll need to take before applying for a VA loan is to make sure you meet at least one of the following VA eligibility requirements:
- Veterans and active service members: You’ll need to have served 90 continuous days during wartime or 181 days of active service during peacetime.
- National Guard or Reserves: You’ll need to have completed 6 years of service before being honorably discharged or placed on the retired list or have served active duty for a total of 90 days with at least 30 days consecutively.
If you meet any of the above requirements – or you’re a surviving spouse who didn’t remarry before turning 57 or before December 16, 2003 – you should be eligible to apply and qualify for your Certificate of Eligibility (COE), which will prove that you’re eligible for a VA loan.
2. Rent Out A Unit In Your Single-Family Home
While your property must serve as your primary residence, you’re allowed to rent out one or more rooms in your single-family home. So, if you want to finance with a VA home loan and generate some rental income, consider purchasing a home with additional rooms or space.
You can also buy a property that has a detached apartment on the lot or a garage that has been converted into a living space if you prefer more separation from your potential tenants.
3. Buy A Multiunit Property
One unit would need to serve as your primary residence, so you’d be required to live on the premises. But you could generate additional income by renting out any units you’re not occupying
4. Buy A Second Home With Your VA Entitlements
Instead of traditional loan limits, the Department of Veterans Affairs uses VA loan entitlements to determine the maximum amount they’ll repay your mortgage lender if you default on your loan.
The VA offers two types of entitlements:
- Full entitlement: Full entitlement means that you’ve never used your home loan benefit or that your full entitlement has been restored because you’ve repaid a previous VA home loan in full. The VA no longer places limits on loans over $144,000 for eligible borrowers with full entitlement. The VA also guarantees to repay 25% of any loan amount that your mortgage lender approves you for. So, if you have full entitlement, you’re not limited on how much you can borrow without making a down payment.
- Partial entitlement: Also called reduced entitlement or remaining entitlement, this means that you currently have a VA loan you’re paying for, you’re still living in a home you purchased with a VA loan that you’ve repaid in full, or you’ve previously defaulted on a VA mortgage.
With partial entitlement, you may be able to buy a second home with no money down, but you’ll need enough entitlements left over to cover 25% of your new mortgage loan. Otherwise, your VA lender may require you to make a down payment to cover the difference.
5. Rent Your Home After 12 Months
If you’ve lived in your home for a year – or you’ve been assigned to a new duty station before the 12-month benchmark – you can rent out your VA loan-financed house. Your tenant won’t need to be a service member or veteran who qualifies for a VA loan.
6. Refinance With A VA Streamline Or IRRRL
If you’re still an active-duty service member and are given a new permanent assignment that is a non-commutable distance from your primary residence, you may want to purchase a primary residence in your new location.
But what if you’d like to rent out your existing home instead of selling it to free up your VA entitlements? You can take out a VA Streamline Refinance – also called a VA Interest Rate Reduction Refinance Loan (IRRRL).
Converting your VA mortgage loan to a VA IRRRL will exempt you from the VA occupancy rules requiring you to use your property as your primary residence. You’ll be able to purchase a new primary residence with a fresh VA loan while you continue to finance your current home with a VA Streamline Refinance.
To apply and qualify for a VA IRRRL, you’ll need to:
- Have made 6 consecutive months of mortgage payments on your current property
- Demonstrate that refinancing will result in an immediate, tangible economic benefit, such as lowering your mortgage rate or switching your home loan from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.
7. Refinance To A Conventional Loan
If you don’t qualify for a VA IRRRL, you can always refinance your existing VA loan to a conventional loan. While VA loans have more flexible financial qualifying standards than conventional mortgages, conventional loans have fewer property restrictions, meaning you can finance a rental property with a conventional mortgage.
Converting to a conventional loan will also restore your full VA entitlements so you can qualify for a new VA loan with no down payment. But be sure to factor in closing costs as you prepare to refinance to a conventional loan.
8. Sell Your Home
While selling won’t allow you to keep your current home as a rental property, it could technically make it an investment property, especially if you’ve built equity in the home.
Home equity is the difference between the fair market value of your home and the amount you’ve paid toward the principal and interest on your home loan. If you sell your home at market value or higher, you’ll collect this equity in the form of revenue. Any revenue left over after you’ve paid off your VA mortgage will be considered a return on your investment.
The Bottom Line
While the occupancy requirements can make it difficult – if not impossible – for qualifying military service members to use a VA loan for the specific purpose of financing an investment property, you can still generate rental income on a home you’ve purchased with a VA-backed mortgage.
Just make sure you understand the VA obligations, and be sure to weigh all your options to arrive at the investment decision that best fits your needs and goals.
Looking to purchase a second home, or to refinance your current mortgage, so you can become a real estate investor? Begin a loan application today to get advice from a Home Loan Expert and see how much you qualify for.