Real estate investing requires money, and usually more than we like when buying an investment property.
Fortunately, you can leverage other people’s money to buy our own assets. But navigating the world of investment property loans is stressful and oftentimes confusing. Between higher down payments, higher interest rates, and higher lender fees, many real estate investors wonder: How can I use owner-occupied mortgage loans to finance investment properties?
And no mortgage program comes with better terms than VA loans.
VA Loans 101
These mortgages offer tremendous loan benefits and make a great option when buying a home. Emphasis on the word “home”, however — you must move into the property and use it as your primary residence for at least a year.
Guaranteed by the Department of Veterans Affairs (VA), VA loans are convenient, require zero down payment, and do not require a credit score minimum (making it a great investment property loan for borrowers with bad credit). These flexible mortgages have assisted more than 24 million military service members and veterans become property owners.
In many ways, VA loans make for a homebuyer’s dream mortgage. Here are a few important points that you should know before deciding to use a VA loan or not.
Reusable: With a VA loan you are able to reuse the full entitlement as many times as you want as long as the loan is fully paid off each time. If you have lost your loan due to foreclosure, you may be able to qualify for a second.
Not issued by the VA: Contrary to common belief, the VA does not issue the home loans. A third party lender issues the loan, the VA simply guarantees each approved mortgage loan.
No mortgage insurance: Generally, mortgage insurance is required when you put down less than 20%. But the VA’s mortgage loan eliminates the need for any mortgage insurance.
Mandatory fee required: While there is not a mortgage insurance requirement, there is a VA Funding Fee. This fee allows the program to continue and is charged on both purchase and refinancing loans.
No upper loan limit: One great benefit of the VA loan consists of no borrowing limitations. Qualified and approved military members or veterans can borrow as much as the lender allows.
Eligibility for VA Loans
To be eligible for a VA loan, you or your spouse must be an active or former military servicemember. That said, in order to be considered a veteran or military member, there are requirements of how long you served.
To qualify for a VA loan, you must meet one of the following criteria:
- You have served 181 days of active service during peacetime, OR
- You have served 90 consecutive days of active duty service during wartime, OR
- You have 6 years of service in the National Guard or Reserves, OR
- You are the spouse of a service member who has died in the line of duty or as a result of a service-related disability.
Before your loan goes through underwriting, you must provide your lender with a Certificate of Eligibility (COE). Your lender may help you apply for one, or you can apply for one through the VA’s eBenefits portal.
Can You Use a VA Loan for an Investment Property?
The purpose of a VA loan is to assist veterans or military members in purchasing a home with the intent of residing there. Therefore, you can not use a VA loan to flip a house or rent it out without living there yourself, at least not immediately.
However, you can use a VA loan to house hack: move into the property and rent out bedrooms, neighboring units, an ADU, or other space such as storage or parking spaces. In so doing, you can potentially live for free with your rental income covering your mortgage payment. Read up on house hacking tactics here if you’re new to the idea.
You can use a VA loan for a rental property with up to four units (with you moving into one of them). If you are considering using the house hacking tactic, as long as one of the units is your primary residence, multi-bedroom houses, duplexes, triplexes and even fourplex properties are all eligible. The VA lender’s guide declares that each living unit must have:
- Individual utility services or shared lines for water, sewer, gas, and electricity
- Individual shut-offs for every unit
After a year of living in the property, you’ve met the occupancy requirement and can move out and keep it as a rental. If you get restationed through the PCS process, you can also keep the property as a rental.
Qualifying for a VA Loan
Based on your income and credit, lenders prequalify or preapprove you up to a certain loan amount. Preapproval is far more meaningful than prequalification (which means almost nothing). If you use rental income as a large portion of your salary, expect the lender to ask for documentation of your past real estate investments as part of the loan approval process.
For many landlords, rental income is a crucial part of their annual salary and therefore used when assessing their own financial assets. Many buyers purchase a property with the intent of paying for the mortgage or even covering the initial down payment with their future rental income.
When you buy a multi-unit property as a homebuyer, you can typically use future rents on the property to help you qualify for the loan. Most lenders allow you to use 75% of the market rent for the rental units in a multi-family home, which accounts for expenses such as vacancy rate and maintenance. Some want to see a track record of success as a landlord as well.
Like most conventional mortgages, loan applicants need to have cash reserves at closing.
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Alternatives to VA Loans to Fund Rental Properties
If you aren’t eligible for a VA loan, try Fannie Mae’s 3% down loan program (HomeReady) instead. Alternatively, try Freddie Mac’s Home Possible loan program. Both allow a down payment as low as 3%, and loans for multi-unit properties with up to four units. And being conforming mortgage loans, they let you remove PMI once you pay down your balance below 80% of the property value.
If neither of those conventional mortgage loan programs works out, you can also use an FHA loan for multifamily house hacking. But you have to pay the FHA mortgage insurance premium for the entire life of the loan — yikes.
Most require a 15-30% down payment. But they also offer much faster loan closing times, with a streamlined loan application process. They also don’t require income documentation to calculate income ratios.
The Bottom Line
Although the VA home loan was not intended for investment properties, there are indeed ways to “hack the system” if you meet all the requirements.
Regardless of the financing you use, always do your due diligence before purchasing any property to rent. Make sure you calculate the rental cash flow to account for all non-mortgage expenses, so you know exactly what kind of return you can expect.♦
Are you considering using a VA loan for a rental property? What questions or challenges are you running into?
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About the Author
Emma Dudley is a data marketer by day and financial writer by night, early on her journey to financial independence. She lives in Baltimore but loves international travel, and enjoys the challenge of cutting-edge fashion on a cut-down budget.