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What to know before getting a VA loan for a rental property

VA loan. US department of veterans affairs papers.
by Jeff Rohde, posted in Investment Strategy

VA loan programs help veterans and active duty service members to afford a home of their own. What many people are surprised to learn is that a VA loan may also be used to finance the purchase of a rental property, provided that certain guidelines are followed.


Key takeaways

  • VA loans are originated or backed by the U.S. Department of Veterans Affairs.
  • The benefits of a VA loan include no minimum credit score and a 0% down payment.
  • People eligible for a VA loan include veterans, service members, National Guard and Reserve members, and surviving spouses. 
  • VA direct home loans are those where the Veterans Administration serves as the mortgage lender.
  • VA-backed home loans are obtained through conventional lenders and partially guaranteed by the Veterans Administration.
  • Borrowers using a VA loan must occupy part of the property as a primary residence.
  • A VA loan for rental property may be used for 2-4 unit properties, and in some cases a single-family home.

 

Can a VA loan be used to buy a rental property?

VA loans are intended to help current and former service members and their surviving spouses purchase a primary residence. However, it’s also possible to use a VA loan to buy a rental property, provided that specific guidelines are met.

While there may be some hoops to jump through, the advantages of buying a rental property with a VA loan include no minimum credit score and a 0% down payment by working directly with the Veterans Administration instead of a conventional lender. 

In other words, a veteran may be able to purchase an investment property using 100% financing, use rental income from tenants to pay the mortgage and property expenses, and benefit from the numerous tax deductions that real estate investors enjoy.

 

Types of VA home loans

A VA loan can be used to purchase an existing home, build a new home, improve a home, or refinance an existing home loan. There are two types of loan programs from the VA:

  • VA direct home loan where the Veterans Administration serves as the mortgage lender. Borrowers work directly with the VA, and loan terms and conditions may be better than those offered by conventional lenders such as a bank, credit union, or mortgage company.
  • VA-backed home loans are partially guaranteed by the Veterans Administration and obtained from a conventional lender. Although a borrower will need to meet a lender’s credit and income requirements, lenders generally see less risk in a VA loan and a borrower is more likely to receive better loan terms. According to the Veterans Administration, nearly 90% of all VA-backed loans are made without a down payment, even though the loan is originated by a conventional lender.

 

Military Family

Who is eligible for a VA loan?

The first step in obtaining a VA direct or VA-backed loan is to apply for a Certificate of Eligibility (COE) to show a lender. The following types of borrowers listed on the VA’s website are eligible for a VA loan for a rental property:

  • Veteran
  • Active-service military members
  • Current or discharged members of the Reserves or National Guard
  • Surviving spouse of a Veteran who died on active duty or who had a service-connected disability

 

What types of rental property can be purchased with a VA loan?

A borrower may find significant advantages in using a VA loan to purchase a rental property. However, there are some specific guidelines to be aware of when using a VA loan for a rental property.

Owner occupied

A borrower using a VA loan must occupy part of the property as a primary residence. For example, if a duplex (2-unit) property is being purchased, a borrower must live in one of the units as the main home.

Small multifamily property

VA direct and VA-backed loans may be used to purchase small multifamily properties with 2-4 units. A borrower would need to occupy one unit as a primary residence, but would be able to use the remaining units as rentals. Depending on the real estate market, multifamily (or multi-unit) properties may also be known as a duplex, triplex, or fourplex. 

Single-family home limitations

A VA loan can be used to purchase a single-family home as a primary residence that is partially used as a rental property. For example, a borrower may house hack by renting out a spare bedroom or turning the attic or basement into a studio apartment for rent. A single-family home with a detached apartment on the same lot may also be purchased using a VA loan.

 

Does rental income help to qualify for a VA loan?

In some cases a borrower using a VA loan may be able to use the existing or projected income from the property being purchased to help meet the income requirements a lender has for a borrower. A lender will generally count 75% of a property’s rental income as part of a borrower’s total income. 

To illustrate, assume that a 3-unit triplex has a history of generating rental income of $1,000 per month per unit. Remember that to qualify for a VA loan for the multifamily rental property, the borrower will need to live in one of the units as a primary residence. The rental income from the remaining 2 units will be $2,000 per month or $24,000 per year. 

If the borrower’s regular income is $50,000, a lender may add an additional $18,000 to the borrower’s total income – for a total income of $68,000 – when reviewing the loan application. 

Some VA lenders may also have other restrictions for a rental property loan. 

For example, a borrower may be required to have up to 6 months of cash on hand to pay the mortgage and property expenses. Also, lenders may require that rental income from any current tenants be provable by using bank statements or tax returns as evidence the rental income was received.

 

military family moving

What happens to a VA loan if a borrower moves?

The possibility of being transferred to another state or even out of the country is a fact of life for active duty service members. Fortunately, borrowers who used a VA loan to purchase a rental property have several different options if they are transferred.

Sell the property

If a borrower with a VA loan is transferred, one option is to sell the home outright. A seller may hire a real estate agent to list the home on the local MLS, or sell the property themselves. 

On the other hand, if the property has tenants or might make a good rental, sellers have other good options. Listing a home for sale on Roofstock can be a good way to reach a global network of real estate investors while saving money by paying a real estate commission of only 3%. 

Roofstock is the #1 marketplace for buying and selling single-family rental investment properties, and the tenants can stay in place and keep paying the rent until the transaction closes. 

After submitting a listing, the team at Roofstock launches the listing and negotiations are done entirely online. Transactions generally are completed timely and efficiently once the purchase and sale agreement are signed.

Have a buyer takeover the VA loan

Having a VA loan on a rental property can be a hot button for buyers when and if the time comes to sell, because more conventional mortgage loans are not assumable.

A VA loan can be assumed by a buyer who is not a veteran, provided that the lender participates in the VA loan assumption program and the buyer can meet the lender’s credit and financial qualifications. A seller with a VA loan could also have a friend or family member move into the property and assume the loan, instead of selling the home to a complete stranger. 

Keep the home as a rental

Active service members who use a VA loan to purchase a home can also keep the property and use it as a rental, even if the property is a single-family home. Hiring a local professional property management company to take care of the tenants and the property may be a good choice for service members who are transferred.

However, most VA-backed loans from conventional lenders require a borrower to occupy the home as a primary residence for at least one year before turning the property into a rental, so service member investors should check their mortgage note.

 

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