VA Loan For Investment Property: Can You Use One?

VA Loan For Investment Property:

VA home loans are a favored financing option among eligible active-duty service members, veterans, and their surviving spouses. These loans, guaranteed by the U.S. Department of Veterans Affairs (VA), often come with the advantage of requiring no down payment, competitive interest rates, and additional unique benefits.

If you’re eligible for a VA loan, you might be curious about whether it can be applied towards the purchase of an investment property.

Let’s tackle this inquiry before diving into the fundamentals of VA entitlement to ensure you have a comprehensive grasp of your capabilities and limitations in utilizing a VA loan for investment property acquisition.

Is It Possible To Use A VA Loan For An Investment Property?

Primarily, VA loans are designed for primary residences — the property where the borrower resides most of the year. Nonetheless, the possibility of using a VA loan for acquiring an investment property isn’t entirely excluded. There are specific exceptions that may permit the use of a VA loan for real estate investments.

Utilizing a VA Loan for Investment Purposes Within Your Primary Residence 

Although a VA loan must be applied to your primary residence, there are ingenious methods to leverage your home as an investment opportunity for additional income. Here are some innovative strategies to consider.

Renting Out Space in Your Primary Home 

If your home offers extra space, such as a spare bedroom or a guest house, you have the option to rent these out for additional income. The key is that the property remains your primary residence. The flexibility of how you rent out parts of your home is yours, and a VA loan can facilitate the acquisition of such a property. If you’re considering this path, it’s wise to secure mortgage approval early, providing clarity on your budget and the potential rental spaces within properties of interest.

Investing in a Multi-Unit Property 

A VA loan allows for the purchase of properties ranging from single-unit homes to quadplexes, provided you occupy one unit as your primary residence.

This approach means you can indeed invest in a property using a VA loan. By residing in one unit and treating it as your primary home, you’re free to rent out the additional rooms or units as you see fit.

Grasping the Concept of VA Loan Entitlement 

Understanding if a VA loan can be applied to an investment property, let’s delve into what VA entitlement means. The VA itself doesn’t provide loans but guarantees a portion of your loan, known as an entitlement, covering up to a quarter of the loan amount. This guarantee is a key advantage of VA loans, enabling benefits like no down payment requirements. Your entitlement details are available on your Certificate of Eligibility (COE), which you should review before budgeting for your home purchase.

Assumability of VA Loans 

A distinctive feature of VA loans is their assumability, allowing a buyer to take over the existing VA mortgage of a seller. This can offer the advantage of securing financing at a lower interest rate than current market rates.

Requirements for Assuming a VA Loan 

While military or service membership is not a prerequisite for assuming a VA loan, approval from the Regional VA Loan Center may be necessary depending on the specific loan, potentially lengthening the process.

For loans issued on or before March 1, 1988, lender approval is not required for assumption. However, without this approval, sellers could remain liable for payments if the buyers default. These older loans might also carry higher interest rates due to their age.

Remember, restoring your entitlement is only possible if the assuming buyer is also an eligible veteran who can substitute their eligibility for yours.

Understanding Basic and Bonus Entitlement 

Basic entitlement refers to the initial portion of VA entitlement, available if you’ve never used a VA loan or have restored your entitlement. It typically covers 25% of your loan amount up to $144,000, equating to a maximum guarantee of $36,000. However, this does not cap your total entitlement; there’s also bonus entitlement for loans exceeding $144,000, extending your borrowing capacity for higher-priced homes. The VA guarantees up to 25% of the loan amount under this additional entitlement.

VA Funding Fee 

It’s crucial to note the VA funding fee, a charge that underwrites the cost of the VA loan program, ranging from 1.25% to 3.3% of the loan amount. The exact fee depends on various factors, including the loan type, your service type, and whether it’s your first VA loan. Exceptions to this fee include veterans with service-connected disabilities, active-duty Purple Heart recipients, and surviving spouses. This fee can be financed into your loan if necessary.

Loan Limits and Their Impact 

For those with full entitlement, VA loan limits do not apply. However, for purchases with partial entitlement, such as when buying a second home, the loan limit is determined by the county and accounts for the entitlement already utilized. The Department of Veterans Affairs will cover up to 25% of the county loan limit minus any entitlement you’ve previously used. You can find county loan limits through the Federal Housing Finance Agency. If purchasing with remaining entitlement and the loan amount exceeds $144,000, a down payment may be required, although a VA-backed loan could still enable borrowing above the county limit pending lender approval.

If You’ve Already Secured a Home with a VA Loan 

Leveraging the VA loan’s benefit more than once is a distinct advantage, provided the service member retains their eligibility and meets lender qualifications. This flexibility means purchasing another home isn’t restricted by the number of uses.

Possessing Multiple VA Loans Simultaneously 

Under certain conditions, such as receiving permanent change of station (PCS) orders, a service member may be eligible for two concurrent VA loans.

Repaying the First VA Loan 

Typically, the acquisition of a second VA loan is contingent upon settling the first. To regain full entitlement, the initial home loan must be repaid in full. Otherwise, any remaining entitlement can be applied towards the new loan.

Maintaining a VA Loan on a First Property Should you choose to retain your first home—with its VA loan unpaid—and acquire a second property, it’s crucial to ensure you can manage both financial responsibilities. Your first property can then serve as a secondary home under specific conditions.

However, adherence to the VA loan’s occupancy rules is mandatory; a new property purchase requires moving in within 60 days. Active-duty personnel may have their family or dependents reside in the home to satisfy this requirement.

The Essence: Investing with a VA Loan Within Guidelines 

VA loans offer an accessible path to homeownership for military service members and eligible surviving spouses, thanks to the VA’s partial backing of the loan. This support reduces the financial burden on the borrower and offers protection to the lender.

When considering a VA loan for an investment property, it’s imperative to use the property as your primary residence. Renting out parts of the home, like a bedroom or guest house, is permissible provided you inhabit the property, aligning with VA regulations.

For those contemplating a property purchase with a VA loan, seeking initial approval from Elevation Mortgage positions you to act swiftly upon finding a suitable property.