Last Updated: December 2023
The VA loan is a government-backed loan program available to eligible veterans, active-duty service members, and reservists. The loan is guaranteed by the Department of Veterans Affairs and can be used to refinance existing loans or finance the purchase of residential properties. VA loans are primarily intended for owner occupied single-family homes, but can also be used for multi-family properties as long as the owner lives in one of the units. With lower interest rates, no down payment requirements, and more lenient credit qualifications compared to conventional loans, VA loans are one of the best ways for veterans and active-duty military personnel to build wealth through real estate investing.
What is a VA Loan?
A VA loan is a type of mortgage loan guaranteed by the U.S. Department of Veterans Affairs (VA) and is designed to help eligible American veterans, active-duty military personnel, and their surviving spouses obtain financing for purchasing, refinancing, or constructing a home. VA loans are issued by private lenders, such as banks and mortgage companies, but the VA guarantees a portion of the loan, enabling the lender to offer more favorable terms, including lower interest rates, no down payment requirements, and more lenient credit requirements compared to conventional loans.
Important VA Loan Terms
U.S. Department of Veterans Affairs (VA) – The U.S. Department of Veterans Affairs (commonly called “VA”) is a federal government agency responsible for providing a variety of services and benefits to American veterans, active-duty military personnel, and their eligible family members. One of the key programs offered by the VA is the VA Home Loan program, which helps eligible individuals obtain mortgage loans for purchasing, refinancing, or constructing homes.
VA Funding Fee – The VA funding fee is a one-time payment that the Veteran, service member, or survivor pays on a VA-backed or VA direct home loan. This fee helps to lower the cost of the loan for U.S. taxpayers since the VA home loan program doesn’t require down payments or monthly mortgage insurance.
VA Loan Requirements for Rental Properties
Although VA loans are primarily designed for financing primary residences, it is possible to use a VA loan for a rental property under certain circumstances. To use a VA loan for a rental property purchase, borrowers should have a basic understanding of rental real estate finance and meet the following requirements:
To use a VA loan for a rental property, the borrower must intend to occupy one of the units in a multi-unit property (up to four units) as their primary residence. The remaining units can be rented out. Single-family rental properties that the borrower does not plan to occupy are not eligible for VA financing.
2. Eligibility Criteria
Borrowers must meet the VA’s eligibility criteria, which include service requirements for veterans, active-duty service members, National Guard members, reservists, and in some cases, surviving spouses. Additionally, borrowers must have sufficient VA loan entitlement available to cover the loan.
3. Good Credit and Income
While the VA does not set a minimum credit score, individual lenders may have their own credit score requirements, typically ranging from 580 to 620 or higher. Borrowers must also demonstrate a stable and reliable source of income, and lenders will consider the borrower’s debt-to-income (DTI) ratio to ensure they can manage the mortgage payments along with their other debts.
4. Property Appraisal and Minimum Standards
The property must undergo a VA appraisal, which evaluates the market value and the property’s condition to ensure it meets the VA’s minimum property requirements (MPRs). MPRs include guidelines related to safety, sanitation, and structural integrity. The property must meet these standards to be eligible for VA financing.
Pros & Cons of a VA Loan for a Rental Property
VA Loan Pros
- No down payment requirement: VA loans do not require a down payment, allowing eligible borrowers to purchase a property without the need for substantial upfront capital. This can be particularly beneficial for veterans and military personnel with limited savings.
- Competitive interest rates: Since VA loans are guaranteed by the U.S. Department of Veterans Affairs, they often come with lower interest rates compared to conventional loans. This can result in significant cost savings over the life of the loan.
- No private mortgage insurance (PMI): Unlike conventional loans, VA loans do not require borrowers to pay private mortgage insurance, which can reduce the overall monthly payment and make the investment more affordable.
VA Loan Cons
- Owner-occupancy requirement: VA loans are primarily designed for owner-occupied properties, meaning the borrower must live in the property as their primary residence. To use a VA loan for a rental property, the borrower must either live in one of the units of a multi-family property or convert their existing VA-financed primary residence into a rental after meeting specific requirements. A good approach could be the BRRRR investment strategy while living in the property.
- Limited eligibility: VA loans are only available to eligible veterans, active-duty military personnel, and certain surviving spouses. This restriction limits the availability of VA loans for rental property investments to a specific group of individuals.
- Funding fee: VA loans typically require a funding fee, which is a one-time payment that can be financed into the loan or paid upfront. This fee varies based on the borrower’s military category, loan type, and down payment amount, and may increase the overall cost of the loan for some borrowers.
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Rental Property VA Loan FAQ
Can I Use a VA Loan to Buy a Rental Property?
The primary purpose of VA loans is to help veterans and active-duty military members purchase their primary residence. You cannot use a VA loan to buy a property solely as a rental investment, however, you can use a VA loan to purchase a multi-family property (up to 4 units) if you intend to occupy one of the units as your primary residence. while renting out the other units.
If I Purchased My Primary Residence With a VA Loan, Can I Rent it Out Later On?
Yes, if you initially occupied the home as your primary residence, you can later rent it out if you choose or need to move. However, if you decide to purchase another home, you might need another type of financing if you’ve exhausted your full VA entitlement or if the property doesn’t meet VA loan occupancy requirements. Similarly, if you intend to purchase an investment property in addition to your primary residence, you will likely need to use one of the many rental property loan products.
How Does the VA View Rental Income When Qualifying for a VA loan on a Multifamily Property?
If you’re purchasing a multifamily property and plan to rent out the additional units, the VA allows lenders to consider the potential rental income. This can help offset the mortgage payment. However, the exact amount of rental income considered can vary by lender, and you may need to have prior experience as a landlord for the income to be fully counted.
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