How To Use A VA Loan For An Investment Property

Most active-duty service members and veterans, as well as qualifying National Guard personnel, reservists and surviving spouses can use VA loans to purchase primary residences. But what about using a VA loan to buy investment properties? Is that allowed?

We’ll explain whether you can purchase an investment property with a VA loan. And if so, how it might work.

VA Loan Overview

First, it’s important to understand the concept of a VA home loan before deciding whether to use one to build your real estate portfolio.

VA loans are backed by the Department of Veterans Affairs. VA loans allow qualified individuals to purchase a home, often with no down payment. They offer competitive interest rates and don’t require private mortgage insurance (PMI). Instead, there’s a one-time funding fee borrowers typically pay.

Now that we know the basics of VA loans, let’s dive into whether you can use one to purchase an investment property.

Can You Use A VA Loan For An Investment Property?

Although VA loans have more relaxed requirements than conventional loans, VA loans are limited to primary residences. As a result, borrowers can’t use a VA loan to purchase a residential or commercial property as an investment property.

The VA loan program primarily focuses on helping eligible home buyers purchase residences to live in full time. However, the rule prohibiting a buyer from using a VA loan for an investment property does have a few caveats.

Primary Residence With Extra Space

The property you’re purchasing must be your primary residence to qualify for a VA loan.

Let’s say, for example, a borrower purchases a property with a detached apartment or has an extra room in their single-family home. As long as the borrower lives there, they can rent out the detached apartment or extra room and stay in compliance with the VA’s occupancy requirement.

A 1 – 4 Unit Property

A VA loan can be used to purchase any of these types of homes: a single-unit home, a duplex, a triplex or a quadplex.

If you’re looking to buy an investment property with a VA loan, your best bet is a duplex or other multifamily home style. As long as you live in one of the units while renting out the other units, the home will be considered your primary residence.

Understanding The VA Loan Entitlement

It’s important to know that when you get a VA loan, the VA doesn’t lend money to you directly. The VA guarantees up to a quarter of the loan you receive from a VA loan lender through a procedure known as entitlement. You can find your entitlement information on your Certificate of Eligibility (COE).

Certain VA eligibility requirements have VA entitlements. They include completing at least one of the following:

• 90 consecutive days of active service during wartime
• 6 years of service in the National Guard or Selected Reserve
• 181 days of service during peacetime
• 90 continuous days of service if you’re an active-duty service member

You can qualify for a VA loan even if you were discharged for a service-related disability. And surviving spouses of veterans and service members can also qualify for a VA loan if they haven’t remarried, remarried after age 57 or remarried on or after December 16, 2003.

The VA loan entitlement is important to understand because it’s the dollar amount the VA guarantees it will repay your mortgage lender if you default on your mortgage loan.

Basic Entitlement

Provided you meet the VA’s criteria, if you’ve never borrowed a VA loan or have fully restored it, you have what’s known as basic or full entitlement. Basic entitlement guarantees 25% of your total loan amount up to $144,000.

Bonus Entitlement

A bonus entitlement refers to any mortgage loan over the $144,000 basic entitlement amount. Bonus entitlement helps you borrow money for homes at a higher price point and is sometimes called Tier 2 entitlement.

Loan Limits

Loan limits don’t impact borrowers with full entitlements. They only come into play when you have a partial VA entitlement and buy another home with a VA loan after your first VA home loan purchase. You may encounter loan limits if you’ve had a previous foreclosure or short sale and haven’t paid back the VA. You may also need to make a down payment.

Check the Federal Housing Finance Agency county conforming loan limits map for more.

What Happens To The VA Loan If You Move?

You’re probably no stranger to moving if you’re an active-duty service member or a veteran. If you purchased a rental property with a VA loan and must relocate, here are your options:

Sell The Property

If you’re moving, the obvious step would be to sell your property. A real estate agent can list the property on the multiple listing service (MLS) and help you with the entire selling process.

Have A Buyer Take Over The VA Loan

A VA loan can go to a buyer who isn’t a veteran, but the lender must participate in a VA loan assumption program. In addition, the buyer must meet the lender’s credit and financial criteria.

When your buyer isn’t eligible for a VA loan, but they assume your VA loan, you’ll lose your VA entitlement. If a qualified veteran buys your property, they’ll substitute their entitlement with yours, and you get to walk away from the deal with your entitlement intact.

Keep The Home As A Rental

You can turn the home into an Airbnb or hire a management company to take over the property and manage the home as a rental. Converting your home into an investment property exempts you from VA loan occupancy requirements as long as you lived in the home for at least 1 year before you moved. However, your entitlement will not be restored unless you pay off the VA mortgage or sell the property.

Consider A Refinance

If an active-duty service member is reassigned and has to move, they can opt to refinance.

With a VA Streamline Refinance, also known as the VA Interest Rate Reduction Refinance Loan (VA IRRRL), you may be able to get a lower interest rate on your loan and finance the rental property. You must certify that you occupied the home as your primary residence before you can use it as a rental, investment or second home.

You can also refinance your VA loan into a conventional loan. This process can be lengthier, but you can restore your full VA entitlement and have the option to qualify for a new VA loan later on.

A Checklist For VA Investment Property Guidelines

Building a real estate portfolio is no small undertaking. Use our checklist to learn how to use your VA loan for rental property.

1. You should confirm that you’ll meet lender and VA eligibility requirements.

2. Next, you must decide on the type of property you want to rent: a single-family home versus a multiunit property.

3. Then you can use your VA entitlement to purchase the property and live there with tenants or wait 1 year to move out and rent the property.

4. Compare refinancing your VA loan with a VA IRRRL or a conventional loan instead of selling your home.

5. You can sell your home if you’ve built up enough equity. With this approach, you won’t generate rental income from the home, but you can get a solid return on your investment.

The Bottom Line: You Can Use A VA Loan For Investment Properties, But Read The Fine Print

If you plan to use a VA loan for an investment property, make it your priority to know and comply with all the guidelines. Using a VA loan to buy an investment property has risks – one of them being occupancy fraud – so take some time to figure out whether it’s the right decision for you.

Are you ready to use your VA loan to purchase a home that may become a future investment property? Get started on the application process today and discover what options are available for you.