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.
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.
Follow the steps and tips below to get your primary residence pulling double duty as a real estate investment property.
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:
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.
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.
The VA allows you to purchase a multifamily property of up to 4 units, such as a duplex, triplex or fourplex – also known as a quadplex.
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
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:
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.
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.
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:
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.
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.
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.
Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.
About Author
