Buying A Second Home With A VA Loan
VA loans, provided by the Department of Veterans Affairs (VA), offer numerous advantages for eligible individuals looking to buy a home. These benefits include no requirement for a down payment and more lenient criteria for credit scores and debt levels.
Given the nomadic lifestyle often associated with military service, the capability to acquire multiple homes throughout one’s life using a VA loan is highly beneficial. However, what options are available if you’re interested in buying a new home with a VA loan while retaining ownership of your previous one?
It is indeed feasible to secure a VA loan for purchasing a second home or even an investment property, but there are important details you should be aware of. We will delve into the specifics of how you can leverage a VA loan to finance the acquisition of a second property.
Is It Possible to Obtain a VA Loan for a Second Home?
Indeed, purchasing a second home with a VA loan is an option, but it requires adherence to specific guidelines.
Typically, the term “second home” refers to a vacation residence, a retreat from daily life’s demands. However, since VA loans are designed to facilitate the buying or refinancing of a primary residence, you must comply with the VA loan’s occupancy rules. This stipulates that you cannot use a VA loan to buy a property that you do not plan to live in for the majority of the year.
To qualify as purchasing a primary residence, you need to move into the house within 60 days, although there are exceptions to this rule, which we will explore further.
Scenarios for Acquiring a Second Home Using a VA Loan
Let’s examine some common situations you might encounter when seeking a VA loan for a second home.
Scenario 1: Your First Home is Fully Paid Off
A straightforward case is if you have fully paid off your initial VA loan and wish to retain the first property. In such instances, you’re eligible for a one-time restoration of your full VA entitlement to secure another VA loan.
Scenario 2: You Still Owe on Your First Home
If you have not yet paid off your first home and plan to keep it, either permanently or while attempting to sell, you can designate your original VA-loaned property as a second home. Qualifying for a new loan, however, requires you to manage both mortgage payments.
Should you decide to retain the property indefinitely, your eligibility for a subsequent VA loan depends on the remaining entitlement available. We will delve deeper into the technical aspects of this later.
Scenario 3: Selling Your First Home
Selling your first property opens up the possibility of transferring your VA loan to the buyer. VA loans are assumable, meaning the new owner can continue the mortgage under the existing terms.
Selling to a non-VA eligible buyer under an assumption means you forfeit your VA entitlement linked to that property. Conversely, selling to a VA-approved buyer allows for the transfer of entitlement, freeing you to purchase another home with full VA entitlement.
Understanding VA Entitlement
Entitlements are crucial in the context of VA loans, representing the guarantee amount the VA offers to the lender should you default on the loan.
Basic and bonus entitlements are two types discussed. Every veteran receives a basic entitlement of $36,000, reflected in your Certificate of Eligibility. This amount is based on the premise of a $144,000 home value. However, with home prices often exceeding this figure, bonus entitlement comes into play, covering 25% of the home price above $144,000.
The situation differs when you have partial entitlement, which arises when obtaining a new VA loan without settling the previous one. Further details on bonus entitlement will be provided.
Utilizing a VA Loan for Investment Purposes
VA loans are primarily designed for the acquisition of primary residences, which means purchasing a property solely to rent it out is not within the intended use. However, if circumstances change and you decide to move, the property can be transitioned into a rental property. In such cases, consulting your lender is advisable.
Your lender might request lease agreements and conduct an appraisal to verify that the anticipated rental income supports future mortgage payments. After the property is transformed into a rental, this income can aid in the purchase of your next home, though it’s important to note that 25% will be deducted as a vacancy factor to account for potential tenant turnover.
A more typical approach to earning rental income involves purchasing a multi-unit property as your primary residence. By living in one unit and renting out the additional units, you can generate income while still adhering to the terms of a standard VA loan.
Lender requirements vary, but for instance, at Rocket Mortgage®, qualifying with projected rental income necessitates having reserves sufficient to cover six months’ worth of payments, protecting against potential income disruptions. Additionally, lease agreements must be established prior to qualification.
Purchasing a Vacation Home with a VA Loan
A VA loan is designated for the purchase of a primary residence. Nonetheless, there are specific circumstances under which you can acquire a vacation home while adhering to VA loan guidelines.
One scenario involves relocating to a new duty station and designating a new house as your primary residence, while retaining your previous home as a vacation spot. Similar to the process with investment properties, you can transition your primary residence and acquire a second home, provided you can manage both mortgages simultaneously.
Another possibility is buying a second home with the intention of making it your primary residence upon retirement. Normally, VA loan rules require you to move into a new primary residence within 60 days of purchase. However, active-duty service members nearing retirement within a year can specify their anticipated move-in date. Additionally, if you’re on active duty, your spouse can fulfill the occupancy requirement on your behalf.
Exploring Bonus Entitlements
VA home loans offer the significant advantage of potentially requiring no down payment. As a government-backed program, it ensures that should a borrower default, the government guarantees at least 25% of the loan amount, given the borrower has full entitlement.
To offset costs, most borrowers are required to pay a funding fee, either upfront at closing or throughout the loan’s life. Another measure is the entitlement limit. Unlike traditional loans, the VA doesn’t impose standard loan limits for a single property purchase, guaranteeing 25% of the loan amount for the first property.
For veterans purchasing a second primary property without a down payment, sufficient remaining entitlement is necessary to cover 25% of the new loan since this is the portion guaranteed by the VA on the first loan.
In cases where only partial entitlement remains, lenders might ask for a down payment to bridge the gap between the remaining entitlement and 25% of the new loan amount.
Illustration of Partial Entitlement
Determining the maximum VA guarantee can be complex, influenced by prior entitlement usage and local conforming loan limits. This calculation is crucial as it impacts any required down payment.
For example, consider Joan, who wishes to buy a $400,000 home in an area with a $766,550 conforming loan limit, having previously utilized $100,000 of her VA entitlement without restoration. Here’s how the calculations work:
Firstly, calculate 25% of the local loan limit minus the used entitlement: $766,550 × 0.25 – $100,000 = $91,637.50
Secondly, calculate strictly 25% of the loan amount: $400,000 × 0.25 = $100,000
The VA will guarantee the lesser amount, in this case, $91,637.50. Since lenders like require the combination of any down payment and the VA guarantee to cover at least 25% of the loan amount, Joan would need to make an $8,362.50 down payment ($100,000 – $91,637.50).
Therefore, restoring your entitlement after selling a property is critical, although it’s not an automatic process and requires application. To confirm full entitlement, your Certificate of Eligibility should indicate $36,000 available in basic entitlement. If it shows less, you may need to prepare for a down payment based on the calculations above.
Understanding Partial Entitlement for VA Loans in Expensive Markets
As previously discussed, VA loans generally do not have loan limits for the purchase of a primary residence. However, when you’re looking to acquire a second home using a VA loan, county-specific loan limits come into play. In areas with the highest property costs, these limits can reach up to $1,149,825 for single-unit homes.
Consider Joan’s scenario: she aims to purchase an $800,000 house within a region where the loan limit is $1,149,825, and she has already utilized $100,000 of her entitlement.
To calculate the required down payment, two key equations are used:
First, 25% of the county loan limit minus any previously used entitlement: $1,149,825 × 0.25 – $100,000 = $187,456.25
Next, 25% of the new loan amount: $800,000 × 0.25 = $200,000
Joan would need to cover the difference with a down payment since the VA guarantees the lesser of the two amounts, resulting in a $12,543.75 down payment according to most lenders’ policies.
While VA loan limits primarily affect those purchasing a second property, lenders may impose specific conditions for larger loan amounts. For example, Elevation Mortgage offers VA jumbo loans up to $4 million with no down payment for those with greate FICO scores.
Restoring VA Entitlement
A unique benefit of VA loans is the possibility of restoring your full VA entitlement after completely paying off a previous VA loan, enabling the purchase of another primary residence with a VA loan. This process involves submitting Form 26-1880 to the VA to request a Certificate of Eligibility, a step your lender can assist with.
However, it’s important to note that this restoration can only be done once, which means it’s not possible to continuously use VA loans for converting properties into investment opportunities.
The Key Takeaway: Dual Home Ownership with VA Loans
VA loans are designed to assist eligible individuals in acquiring primary residences. While purchasing a property with the intention of using it as a second home or investment property directly is not permitted, it is possible to convert a property into such after fulfilling residency requirements. Additionally, generating rental income is feasible by occupying one unit of a multi-unit property and renting out the others.
If considering the purchase of a second home with remaining VA entitlement, understanding how your entitlement and the local loan limits interact is crucial. If you’re uncertain, seeking guidance is always a wise choice.
Ready to proceed? You can start your application online or reach out for assistance at (719) 445-2959.
Reed Letson
Reed offers two decades of expertise as a mortgage broker, focusing on veterans and first-time home buyers. With a strong grasp of real estate and mortgage markets, he empowers clients with practical insights. Reed's passion is guiding clients to build wealth through real estate investments and financing solutions.