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

Veterans Affairs (VA) loans are incredibly popular mortgage options for eligible military members and veterans looking to purchase homes. With perks like no down payment and no mortgage insurance requirements it’s easy to see the appeal.

But can you use a VA loan for an investment property instead of a primary residence?

The short answer is yes, you can use a VA loan for an investment property, but only if you follow the VA occupancy rules. I’ll explain exactly how this works shortly

First, let’s look at some key facts on VA loans:

• VA loans are backed by the Department of Veterans Affairs. They help service members, veterans, and surviving spouses finance home purchases with favorable terms.

• These loans require zero down payment. Qualified borrowers get 100% financing.

• There’s no monthly mortgage insurance, which saves money versus FHA and conventional loans.

• Borrowers must pay a one-time VA funding fee, which can be rolled into the loan amount.

• Interest rates are competitive with conventional mortgage rates.

Now, can you use a VA loan to purchase a pure investment property that you won’t live in? No, VA guidelines prohibit this.

But there are a couple ways eligible borrowers can use a VA loan on a property that will generate some rental income. Let’s explore them.

Meeting the VA Occupancy Rules

The Veterans Affairs implements occupancy rules on properties financed with VA loans. These ensure borrowers use the home as their primary residence.

Specifically, VA guidelines state that you must:

• Move into the property within 60 days of closing
• Occupy the home as your primary residence for at least 12 months
• Certify you intend to meet occupancy rules

Subject to these conditions, veterans and service members have a bit of flexibility to earn rental income in two scenarios:

1. Rent Out Part of Your Primary Residence

If your VA-funded home has enough space, you’re allowed to rent out a portion of it.

For instance, you could lease out an:

• Extra bedroom
• Basement unit
• Guest house or pool house

Many single-family homes can readily accommodate a renter in an excess area. As long as you live in the home as your primary residence, renting out part of the property is perfectly acceptable.

2. Buy a 2-4 Unit “Multi-Family” Home

VA guidelines permit borrowers to purchase a 2-4 unit “multi-family” property with a VA loan.

For example, you could buy a:

• Duplex and occupy one unit
• Triplex and live in one unit
• Fourplex and reside in one of the units

In this scenario, you’d live in one unit as your primary residence and rent out the other unit(s) to generate income.

The property must meet all other VA eligibility standards regarding location, construction, and condition. But this approach does provide an opportunity to invest in rental real estate using VA financing.

Benefits of Using a VA Loan for Investment

Purchasing an investment property while also meeting VA occupancy rules allows borrowers to capitalize on the benefits of a VA loan.

Here are some of the biggest perks:

No down payment – Veterans and qualifying military personnel get 100% financing from a VA loan. There’s no need to come up with thousands of dollars for a down payment like you would for a conventional loan.

No monthly mortgage insurance (MI) – Paying MI protects the lender, but costs the borrower. VA loans skip this expense, saving borrowers 0.5% – 1% of the loan amount annually.

Lower interest rates – VA loan rates compete directly with conventional mortgage rates and are lower than FHA or USDA loan rates. This saves money each month and over the loan term.

No limit on how many times you can use VA financing – Veterans can reuse their VA home loan benefit to purchase another primary residence or investment property after paying off the existing VA mortgage.

VA loans are assumable – An eligible buyer can take over or “assume” the VA loan from a seller instead of having to apply for new financing. This provides flexibility.

Easier to qualify – VA loans have more flexible credit score and debt-to-income requirements than conventional mortgages, making approval more accessible.

Using a VA loan to purchase a multi-unit property or single-family home with rental space capitalizes on these money-saving benefits.

Steps to Buy an Investment Property with a VA Loan

If you’ve determined that purchasing an investment property using your VA home loan eligibility could work for you, here are the steps to follow:

1. Find a VA-approved lender

Not all mortgage lenders offer VA loans. Search for and find one who specializes in this financing.

2. Get pre-approved

Pre-approval from a VA lender will make your offer stronger. It shows sellers you’re qualified and ready to move quickly.

3. Shop for eligible properties

Search for a single-family home with excess living space or a duplex/triplex/fourplex within your budget.

4. Make an offer and enter a contract

Make an offer once you find the right VA-eligible property. Work with your agent to negotiate terms and enter a purchase agreement.

5. Complete the loan application and appraisal

You’ll need to formally apply and document income, assets, and eligibility. The property must also be appraised to guarantee it meets VA standards.

6. Close on your VA mortgage

The lender will prepare closing paperwork detailing the loan terms and escrow and title services will facilitate the closing process.

7. Move into one unit within 60 days

Be sure to establish the home as your primary residence within 60 days and occupy it for at least 12 months as required by the VA.

8. Tenant and manage your rental unit(s)

Once moved in, screen tenant applicants, lease the rental unit(s), and manage the investment property.

Following these steps allows you to tap into your VA benefits to invest in real estate while still adhering to occupancy rules.

Drawbacks of Using VA Financing on a Rental Property

Despite the benefits, there are some potential drawbacks to purchasing an investment property with a VA loan that you should consider:

• The VA funding fee – This one-time fee ranges from 1.4% – 3.6% of the loan amount. On a $300,000 mortgage, it could cost $4,200 – $10,800 at closing.

• Stricter qualifying standards – The VA has minimum property requirements and appraisal guidelines you must meet. This reduces flexibility.

• You can’t leverage rental income – Lenders can’t consider potential rental income because you aren’t purchasing a pure investment property.

• Slower closing timeline – VA loans may require additional paperwork and processing time versus conventional financing.

• Occupancy rules limit flexibility – You must personally live in the home for at least 12 months, restricting how you use the property.

These limitations may outweigh the benefits in certain situations. Carefully consider both when deciding if a VA loan fits your investment property purchase.

Alternatives to VA Financing

Veterans and service members aren’t locked into using VA loans. You may prefer conventional financing or other government-backed mortgages.

Here are some alternatives for investment property financing:

Conventional loans – These standard mortgages from banks allow investment purchases. You can rent out the entire property. 20% down payment is typically required.

FHA loans – FHA allows investment purchases with as little as 3.5% down. But you must live in one unit for at least 12 months, like with a VA loan.

USDA loans – For properties in rural areas, USDA financing permits investment purchases if you live in one unit as your primary residence.

Portfolio loans – Local banks may offer portfolio mortgages to finance investment purchases, especially for multi-family homes.

These options provide greater flexibility to purchase a 100% investment property. Just know they lack some of the VA loan benefits like no down payment.

The Bottom Line

At the end of the day, VA loans offer an affordable financing path for eligible military buyers to purchase a primary residence. Using a VA loan for real estate investing is possible but limited to specific situations.

You can either rent out part of your personal residence or buy a small multi-family home and live in one unit yourself. This allows veterans and service members to tap into the advantages of VA financing while generating some rental income.

But VA occupancy rules prohibit using this financing for a pure investment property you won’t personally occupy. In that case, a conventional, FHA, USDA, or portfolio loan may better suit your needs and provide fewer restrictions.

Either way, be sure to speak with a qualified lending professional about your specific situation to determine if a VA loan aligns with your investment property purchase goals and parameters.