Can You Use a VA Loan for an Investment Property? A Detailed Guide

VA loans are a popular mortgage option for eligible military service members, veterans, and surviving spouses. With generous terms like no down payment and no private mortgage insurance (PMI) required, it’s easy to see the appeal.

But can you use a VA loan to purchase an investment property? That’s a common question among those interested in real estate investing

The short answer is yes you can use a VA loan for an investment property but only if you follow the occupancy rules. Let’s take an in-depth look at how it works.

VA Loan Occupancy Requirements

The Department of Veterans Affairs has occupancy requirements for properties purchased with a VA-backed loan These rules state that you must

• Use the home as your primary residence
• Move into the home within 60 days of closing
• Live in the residence for at least 12 months

So if you’re looking to buy a rental property strictly as an investment, then a VA loan isn’t the right fit.

However, there are a couple scenarios where you can use a VA loan and still generate rental income:

Rent Out Extra Space in Your Primary Residence

If the home you buy has enough space, you may be able to rent out a mother-in-law suite, finished basement, or even standalone guest house.

As long as you live in the home and use it as your primary residence, renting out extra space is allowed with a VA loan.

For example, let’s say you purchase a 5 bedroom, 3 bathroom single family home using your VA benefits. You could live in the main house while renting out the guest house on the property. This allows you to offset some costs while still meeting the VA requirements.

Purchase a Multi-Unit Property

VA loans can be used to buy duplexes, triplexes, and fourplexes. As long as you occupy one of the units, you can rent out the other unit(s) to tenants.

So if you bought a quadplex, you could live in one unit and collect rental income from the other three. Again, this allows you to invest in real estate while abiding by VA guidelines.

No matter which route you choose, consult your lender to ensure the property meets all requirements for a VA-backed loan.

The Pros of Using a VA Loan to Invest

The benefits of VA loans make them well-suited for those who want to house hack or rent out parts of their primary residence. Here are some of the biggest pros:

No Down Payment Required

Unlike conventional loans which typically require 5-20% down, VA loans don’t require any down payment. This gives you more cash in hand to cover other upfront costs.

No Private Mortgage Insurance

Private mortgage insurance (PMI) is usually mandatory if your down payment is less than 20% of the purchase price. But with a VA loan, PMI is never required regardless of your down payment.

Lower Interest Rates

Interest rates on VA loans are consistently lower than rates for conventional or FHA loans. This can equal huge savings over the life of your mortgage.

No Prepayment Penalties

You can pay off a VA loan early without incurring expensive prepayment penalties. This flexibility comes in handy if you later want to refinance, sell, or pay off the mortgage.

Assumable Mortgages

VA loans are assumable, meaning the mortgage can transfer to a new buyer if you sell the home. This can make your property more enticing in the real estate market.

Can Re-use Benefits

You can tap into your VA loan benefit multiple times provided you have sufficient entitlement. This allows you to buy additional VA-backed properties in the future.

The Cons of Using a VA Loan to Invest

While very advantageous, VA loans aren’t perfect across the board. Here are some potential drawbacks to consider:

Strict Occupancy Rules

As discussed already, you must abide by the VA requirements to live in the home as your primary residence. So these loans aren’t suitable if you want a completely hands-off rental property.

Rental Limits on VA Loans

For multi-unit properties, there are limits on how much of the property can be rented out. With a duplex purchase, only one unit can be rented. With a fourplex, three units can be rented with VA financing. Beyond four units, rental limitations depend on the lender and property.

VA Funding Fee

Borrowers must pay a one-time VA funding fee, which is a percentage of the loan amount. This fee typically ranges from 1.4% – 3.6%. Veterans with a disability rating are exempt from the funding fee.

Tougher to Qualify

You must be a veteran, service member, or qualifying spouse to be eligible for a VA loan. If you don’t fall under one of those categories, you won’t qualify for financing.

Lengthier Closing Timelines

Due to the required VA inspections and appraisals, closing a VA loan takes a bit more time than a conventional loan in many cases.

Potential Entitlement Limits

Your available VA entitlement is capped at a certain percentage of the loan amount. So entitlement limits may come into play if pursuing larger VA loans.

As you can see, there are advantages and disadvantages when using VA financing to invest in real estate. Make sure you weigh both as you’re exploring options.

Step-by-Step Process for Buying an Investment Property with a VA Loan

If you’ve decided to move forward with a VA purchase for rental income potential, what’s the process? Here are the basic steps:

1. Research VA-approved lenders

Not all lenders handle VA loans, so you need to find one that’s approved to work with these specialized mortgages. Shop around and compare interest rates and fees.

2. Get pre-approved for a VA loan

Pre-approval shows sellers you’re a serious buyer. Provide documents to verify income, assets, VA eligibility, and other details. This will get you a pre-approval letter stating the loan amount you qualify for.

3. Search for eligible properties

Work with a real estate agent to identify suitable properties that meet VA requirements regarding location, condition, codes, construction, etc. Focus on homes with extra space or multiple units depending on your goals.

4. Make an offer and open escrow

Once you find the perfect property, make an offer and open escrow. Your agent will assist with negotiations. Earnest money and escrow deposits are due at this stage.

5. Complete the full VA loan application

You’ll need to provide paperwork to prove income, assets, identification, VA eligibility and more. Your lender will order the appraisal and issue the Certificate of Eligibility.

6. Get an inspection and appraisal

The property must pass a VA appraisal by a licensed appraiser. You may also want to get a professional home inspection for peace of mind.

7. Receive final loan approval

The underwriting team reviews your full application. Once approved, you’ll get a closing disclosure outlining final loan costs.

8. Close on the home and take ownership

At closing, you’ll sign loan documents and the home officially becomes yours! Finish up by moving in within 60 days.

The entire process usually takes 45-60 days from start to finish.

Alternatives to a VA Loan for Investment Property

VA financing has strict occupancy stipulations. If you don’t want to live in the home yourself, here are some alternative mortgage options:

Conventional Loan

Conventional loans allow non-owner occupancy on investment purchases. You’ll likely need a 20% down payment and good credit.

FHA Loan

An FHA loan requires just a 3.5% down payment. You can buy a multi-family home, live in one unit, and rent the other units.

USDA Loan

For properties in rural areas, USDA loans offer zero down payment options. Occupancy rules are similar to VA loans.

Home Equity Loan

A home equity loan or line of credit against your current property can provide funds to buy a rental property.

Hard Money Loans

Hard money loans are ideal for fix and flips, though terms are less favorable than traditional mortgages.

Private Money Loans

Friends, family members, business associates, and private investors may provide financing in exchange for a stake in the deal.

Business Loans

Some business lenders provide loans to real estate investors – especially those with an established portfolio.

The Bottom Line

At the end of the day, VA loans can be used to purchase properties that generate some rental income, provided you follow the guidelines. This allows eligible buyers to enter the world of real estate investing while taking advantage of the VA benefits.

Just be sure to consult professionals to ensure you pick the optimal loan program and investment property for your individual scenario. With the right approach, you can leverage the buying power of a VA loan to achieve your money-making goals in real estate.