Last Updated on May 11, 2023 by Luke Feldbrugge
If you are interested in using a VA loan for investment property, you’ve come to the right place. Most aspects of the VA loan process are pretty straightforward and clear. This topic, however, is a very twisty path full of exceptions, timing, loopholes, strict rules and flexible policy. There aren’t any easy answers, but if you want to use your VA loan benefit for an investment property (or properties), it is possible. Just promise to hang on for the ride.
Investment properties can be a great source of income and a good side gig. If you are acquainted with the benefits of having a VA loan, you know that having the backing of the U.S. Department of Veterans Affairs can be a big boost toward getting an affordable mortgage. There is whole list of benefits, but the Big Three Benefits of a VA loan are:
- No down payment for VA borrowers
- Low interest rates
- No private mortgage insurance
So if one VA loan is good, then two are better, right? Sort of. Let’s take a look.
Can You Use the VA Loan for Investment Property? The Short Answer is “No”
But like every short answer, it’s not quite complete. The VA loan program is not designed to allow an eligible veteran or active-duty service member of the military to buy investment properties, but it doesn’t forbid it either if you do it right.
First off, you can have more than one VA loan at a time. Because it is allowed, it opens up the opportunity for you to use a VA loan for investment property. It’s just a matter of timing.
Occupancy is the key. When you get a VA loan, or another one, the loan must be for a home that will be your primary residence. So your current loan must be for your current address, as it were. But if this is a new house and a new residence, then your old house can be used for rental property and therefore income. That’s why timing is key.
The VA doesn’t always require mortgage reserves when you get a loan, but in this case, it does. When you are renting your former home, the VA and your private lender will want you to have cash reserves so that you have enough set aside if you lose your renters. The VA will require you to have three months of principal, interest, tax, and insurance (PITI) set aside in case of vacancy.
VA Entitlement and Math
In a straightforward VA loan guarantee, your entitlement only comes into play if you are buying a property with a significant price tag. But when you are looking to use the VA loan for investment property, and starting to juggle multiple properties and multiple loans, your entitlement comes into play fairly quickly.
The VA Certificate of Eligibility (COE) is the one of the first things you will encounter when you start investigating the VA loan process. The COE is exactly what it sounds like: it verifies to the VA loan processors that you are, in fact, eligible for the program.
The COE, once you get it, also lists your VA benefits entitlement, meaning it lists how much of a loan (or loans) they will insure. For example, if you have the full VA entitlement– $647,000 – your mortgage loan can’t be over that amount to stay under your entitlement. If you are looking to get two VA loans, the two added together can’t exceed your entitlement. In this case, you could have a first VA loan for $300,000 and then a second VA loan for $346,000.
This is a good place to pause and remind ourselves that the VA guarantees the loan but doesn’t actually lend the money. That comes from VA-approved lenders or private mortgage brokers. The VA’s insurance, however, is a very strong card in your hand. It tells the lender that the VA is backing your loan, and lenders take that kind of insurance seriously. They don’t typically like risk, and you are a lot less risky with the VA on your side. For the record, Homes for Heroes is very good at matching you with the right mortgage specialist.
If you hit the upper limit of your entitlement, which is likely with two mortgages and two properties, all is not lost. You will, however, need to make a down payment if you go over. If you go back to our list of the Big Three Benefits, not having to make a down payment for a VA loan is first on the list (for good reason).
You might have heard, or read about, VA loan limits. Some folks say they don’t exist. Others say there are loan limits. It’s confusing. The loan limits most websites talk about are really just the entitlement limits, i.e. what the VA will insure for your loan. In practice, the VA doesn’t limit you to the size of the loan you can get, just the amount it will ensure.
Restoring Your Entitlement
With multiple loans, figuring out and keeping track of your entitlement takes some effort. Restoring your entitlement when you pay off one of your mortgages is an important step that you need to remember. Making sure the VA knows your original VA Loan is paid off will let you use your full entitlement as you pursue more VA guaranteed loans.
Restoring your entitlement means changing your COE, and there’s a two-page tutorial that explains how to do that, as well as a downloadable form that you will need to access.
Occupancy Rules and Exceptions
We talked about how each new VA loan you apply for must be for the residence that you will be your primary home. Previous properties can be used as VA home loan rental property. Here again, timing is key. Generally, you need to move into the new house within 60 days.
The occupancy rules have some exceptions because sometimes, due to deployments or retirements, the new owners can’t move in right away or may be away from the residence. These exceptions are:
Retirement – If you want to buy a home somewhere well in advance of your actual retirement day, you have up to a year to move in.
Fixer Upper – If the house needs repairs or renovations that will take longer than 60 days, you can get an exception.
Spouses – If your spouse moves into the home while you are deployed, that counts.
Work Away from Home – If your job takes you away from home, you can ask for an intermittent occupancy exception.
Unusual Circumstances – Talk to your loan officer about other obstacles to your occupancy.
When it comes to rules about how long you must live in the house you buy, it gets a little cloudy. Check out the section on flipping below for a full explanation.
Buy a Multifamily Property with a VA Loan
One fairly simple way to use the VA loan for investment property is to buy a home and generate income at the same time with a multifamily residence, like a duplex or four-plex. This strategy will bypass some of the obstacles we’ve already talked about because you are essentially just making one purchase – not multiple homes with multiple mortgages. You will still, however, need to keep your entitlement under consideration as many of these properties will exceed the $647,000 upper limit.
That’s not necessarily a show stopper, but it could force you to make a down payment. When you buy a multifamily home, you can live in one unit (filling the occupancy requirement) and rent the other units to generate income. The VA limits you to one four-unit property, but they allow two VA eligible military personnel to do a joint loan for up to seven units.
VA Loan Rental Property: Experience Required
If you are looking to use the VA loan for investment property, and want to get into the rental properties business as a landlord, but don’t have experience; think again. The VA requires you have rental management experience if you are going to buy a multifamily unit or rent a previous residence. If you had a property management company working on previous rental units, that may also qualify.
Flipping : What are the VA Loan Rules
Maybe you aren’t interested in becoming a landlord, and instead you want to go into the house flipping business. Can you use the VA loan system to flip? Yes, but it will take some work.
First off, if someone tells you that the VA requires you to live in your newly purchased home for 12 months, take that with a grain of salt. The VA actually has no rules about how long you must live in the house – just how soon you must occupy it. Your private mortgage lender, on the other hand, may have rules in your mortgage document about living in your house for at least a year. That’s a typical requirement, but it could interfere with your house flipping goals.
Therefore, as far as the VA is concerned, you can flip a house right away. You will need, however, to work that out with your private lender. As we have said before, their decisions have as much weight (if not more) as the VA when you are closing on a house.
If you hear anything about a 90-day rule for staying in your new home before you flip it, that’s not from the VA. That’s an FHA rule.
If you are flipping, you’re going to want to keep a close eye on your entitlement. Every house you buy subtracts from it, so when you are flipping, you will need to pay off the mortgage as soon as possible and then restore your entitlement to stay under the entitlement cap. Again, you can go over the entitlement limits, but you will end up with down payment obligations when you exceed those limits.
This begs the question: can you own a string of homes using the VA loan system? If you want to stay within the full entitlement limit of $647,000, it will be tough. After two mortgages–one after the other–you’re going to run into that cap fairly quickly. You could conceivably buy six homes, each with a price tag of $100,000, as long as you are using the most current home you buy as a primary residence. You will want to make sure you restore your entitlement often if you go into the flipping business.
Owning more than two houses using the VA loan system may be possible if, at some point, you want to switch some of the mortgages to conventional loans. For some of your properties, you would be essentially exiting the VA system. In this scenario, you would buy a new house, convert one of your previous residences to a rental and convert another one to a non-VA mortgage (probably by doing a refinance). The conventional mortgage would no longer count against your entitlement in the eyes of the VA. As always, make sure to do a reset on your entitlement if you do this.
Don’t forget the funding fee
While there are a lot of ways to save money through the VA loan process, there is one cost to look out for. The VA Funding Fee is something you pay each time you get your loan guaranteed or insured by the VA system. The one-time fee helps fund the system, but it’s not a small amount. For the first time you use it, it’s only 2.3% of the total loan. The second time you use it, it is 3.6%, and that’s what it will be for the rest of the time you are applying to get a VA loan guarantee. You can, however, fold the fee into the loan and pay it off over time (as long as you don’t push the total over your entitlement). Long story short: if you get two VA Loans, you pay the funding fee twice.
There are some exceptions, that is, veterans who do not have to pay the funding fee.
- Veterans who receive compensation for a service-related disability
- Veterans eligible for service-connected disability pay but receiving retirement or active duty pay instead
- Surviving spouses of a veteran who died in service or from a service-related disability.
- Active military members who have been awarded the Purple Heart.
- Veterans who have a memorandum rating saying you are eligible for compensation based on pre-discharge claim.
Save Money on a VA Loan with Homes for Heroes
With the complexities of using houses as investment properties, let alone involving the VA Loan program in the mix, you need an expert on your side. We can provide a team of experts to get you from the beginning of the search all the way to closing.
When you register online with Homes for Heroes, we connect you with a member of our team who can answer your questions, and if you’re ready to get started, connect you with our local real estate and mortgage specialists. Our local mortgage specialists are instrumental to the VA home loan process. They will help you navigate the VA loan system because they are committed to working with military members and veterans. Our local real estate specialist will get started learning what you want, and help you begin your house hunt.
The check you receive at the end of the home purchase journey is how we say thank you for your service. That Hero Rewards® check averages $3,000 after closing on a house, or $6,000 if you buy AND sell a home.
Register online today, there’s no obligation, and we would be honored to assist you with your VA loan needs or home buying needs.