second va loan for rental property

How to Get a Second VA Loan for a Rental Property

Getting a second VA loan for a rental property can be a great way for veterans to build wealth and passive income through real estate investing However, there are some important factors to consider when using your VA home loan benefit for an investment property. In this comprehensive guide, we’ll walk through everything you need to know about getting a second VA mortgage to purchase a rental home

What is a VA Loan?

First, let’s quickly review what a VA loan is. VA loans are mortgage loans guaranteed by the Department of Veterans Affairs that allow eligible military members, veterans, and surviving spouses to purchase a home with no down payment and looser credit standards

Some key benefits of VA loans include:

• Requires no down payment for up to $417,000
• No monthly mortgage insurance
• Competitive interest rates
• Limited closing costs
• Easier credit qualifying guidelines

VA loans can only be used to purchase or refinance a primary residence – not an investment property. But many veterans are interested in using their home loan benefit to buy rental real estate as well. Let’s look at how it works.

Can You Get a Second VA Loan for a Rental Property?

The short answer is yes – you can get a second VA loan for a rental property in certain situations. However, there are limitations compared to financing a primary residence.

Here are some key points on using a VA loan for an investment property:

• You must live in the home first for at least 12 months before renting it out
• Rental income cannot be used to qualify for the loan
• You’ll need a down payment if your entitlement is less than 25% of the loan amount
• Stricter credit score and debt-to-income requirements may apply

So you can use a VA loan for a rental, but there are more stringent guidelines versus buying a primary home. Let’s break down the specifics.

VA Occupancy Rules

One of the biggest requirements is that you must intend to occupy the home as your primary residence when purchasing it with a VA loan. The VA has strict occupancy rules against using their home loans solely for investment purposes.

However, their guidelines do provide flexibility to move out and rent the property later on. According to VA regulations, there is no minimum time period you have to live in the home before renting it. But most lenders will require you to occupy for at least 12 months before turning it into a rental property.

The key is that you must genuinely intend to live in the home when you buy it with a VA loan. You cannot misrepresent yourself as an owner-occupant if you actually plan to immediately rent it out. That would be mortgage fraud.

As long as you move in and live there for a reasonable period first, renting out the property later on is generally accepted. Just be sure to consult your lender on their specific policies around VA loan occupancy requirements.

Can You Use Rental Income to Qualify?

When getting a second VA loan, rental income from your first VA investment property cannot be used to qualify for the new loan.

The VA has strict rules prohibiting rental income from being counted towards your debt-to-income qualifications for a purchase. Their rationale is that if the property is already financed with a VA loan, it shows you don’t actually have excess income from the rental.

In limited cases, some lenders may allow rental income to lower your ratios if you’ve owned the first rental for 2+ years and can document consistent monthly profits. But most lenders will exclude rental income altogether when approving your second VA loan.

Without rental income factored in, you’ll need to qualify based on your regular employment earnings, retirement income, or other sources. Work with your loan officer to ensure you meet the VA’s debt-to-income requirements without relying on rents from the first property.

How Much Down Payment is Required?

One huge benefit of VA loans is the ability to purchase with zero down payment. However, when getting a second loan, your down payment requirement will depend on your remaining VA entitlement.

VA entitlement refers to the amount of your loan that is guaranteed by the VA – which in turn determines your down payment. For example:

• If you have full entitlement, your entire loan amount is covered and you can buy with no down payment

• If you only have $50,000 in remaining entitlement on a $200,000 loan, you would need around $17,000 as a down payment

So make sure to confirm your current entitlement amount and how it impacts your loan terms. You can ask your lender to run entitlement calculations for you.

The good news is there are a few ways to restore your used entitlement and get back to zero down payment on a second VA loan:

• Selling your first VA home and paying off the loan
• Refinancing your first VA loan to free up entitlement
• Invoking a one-time restoration of entitlement

Talk to your loan officer about these options if you want to avoid a down payment on your next VA purchase.

What Credit Score is Needed?

VA mortgages are known for having more lenient credit requirements than conventional loans. But when applying for a second VA loan, you may face stricter credit standards.

Here are some general VA credit score guidelines to be aware of:

• 580 – Minimum credit score required in most cases

• 620 – Competitive credit score for best rates and terms

• 660+ – Ideal credit score for borrowers with high debt-to-income ratios

So while the VA will go down to a 580 FICO score, lenders will scrutinize your application much more below a 620. Expect to have pristine credit if you already have a VA mortgage and high DTI.

Lenders also want to see your credit scores trending upward over the past couple years. Pay down balances, dispute errors, and take other steps to boost your credit before applying.

What is the Maximum Debt-to-Income Ratio?

Speaking of DTI, qualifying for a second VA loan also means meeting stricter debt-to-income ratios.

The VA limit is 41% for your total debt-to-income. However, most lenders stick to these more conservative DTI caps for repeat VA borrowers:

• 36% DTI if credit score is 680+
• 33% DTI for credit scores between 640-679
• 31% DTI for credit scores 639 or lower

To calculate your DTI, add up your monthly debt payments including the new mortgage payment, divide by your gross monthly income, and multiply by 100. Staying under these DTI limits is key to qualifying if you already have an existing VA loan.

You may need to pay down debts, increase your down payment, or boost your income to meet the VA’s stricter debt ratios on a second loan. But it’s definitely possible with some preparation.

Tips for Getting Approved

Here are a few other tips to boost your chances of successfully qualifying for a second VA home loan:

• Shop around with multiple lenders as VA requirements vary
• Pay down credit cards and other revolving balances
• Keep existing mortgage payment history perfect
• Build up cash reserves – ideally 6 months of reserves
• Write a letter explaining why you need a second VA loan
• Be prepared to document future rental income and expenses

While every lender will have their own policies, following these tips will set you up for the best shot at approval.

VA Loan Limit on a Second Home

One final point – VA loan limits do apply if your entitlement doesn’t fully cover the second loan amount. Here are the 2023 VA loan limits:

• $647,200 for most counties
• As high as $1,089,300 in ultra-high cost areas

You can only borrow above the VA county limit if you have full entitlement, or make a down payment for any excess loan amount.

VA lenders also impose their own internal limits that may be lower than the maximums set by the VA. So your loan amount may be restricted based on your specific lender’s policies as well.

Is Getting a Second VA Loan Worth it?

At the end of the day, whether applying for a second VA mortgage makes financial sense depends on your individual situation.

While using your VA benefits to purchase rental property can be profitable, it also means jumping through extra hoops versus financing a primary residence.

You’ll need to run the numbers on potential rental income, expenses, cash flow, and appreciation potential in your market. Compare that to conventional loan options, down payment requirements, and investment property rates.

Crunching the calculations will tell you if taking on a second VA loan is the optimal move versus other financing routes or investing your money elsewhere.

A VA mortgage for a rental can unlock opportunities for veterans to grow their real estate portfolios and net worth. But proceed with caution by doing your homework first. Follow the guidance above to successfully navigate the process.