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    Investing in real estate is a great way to build wealth over time, and a VA loan may help you purchase investment property. If you’re a service member, veteran or surviving spouse, you may have heard you can only use your VA entitlement to purchase a primary residence.

    While the VA restricts what you can use your VA loan for, you can use it to invest in real estate in a few ways. Using a VA loan for investment property comes with a few caveats, but it might be well worth it if you want to grow your wealth and earn a passive income.

    So how can you use a VA loan for investment property? VA loans are much stricter than other types of home loans regarding occupancy requirements, but there are still ways to use them for investment properties. This article will discuss everything you need to know about using a VA loan for rental property and other real estate investments.

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    VA loan eligibility

    As mentioned, the VA has occupancy requirements, but that doesn’t mean you can’t invest in rental property. But first, you must confirm you’re eligible for the loan.

    To be eligible for a VA loan, borrowers must meet the minimum service requirements set by the Department of Veterans Affairs (VA) and a lender’s specific credit and income requirements.

    To meet the minimum service requirements, you must have served 90 consecutive days during wartime or 181 days during peacetime. National Guard and Reserves members and surviving spouses will also require other qualifications. If you don’t meet the minimum service requirements, you may still qualify for a VA loan if you were discharged for a hardship or a medical condition.

    To verify your eligibility status, lenders need a certificate of eligibility (COE). You can request a COE directly from the VA, or your lender can do it for you. This certificate tells the lender that you qualify for VA benefits and allows them to start the process of approving you for the loan.

    After obtaining your COE, your lender must ensure you meet their minimum eligibility criteria, which include the following:

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    Credit score

    Lenders check your credit score regardless of the type of loan you apply for to ensure you have a history of repaying your debts on time.

    VA loan credit score requirements vary by lender, but they’re usually lower than conventional loans, offering leniency to veterans. For example, most lenders require a minimum credit score of 620, but Griffin Funding requires a score of 500 for VA loan borrowers.

    That said, having a higher credit score can reduce VA interest rates. In turn, this lowers the total cost of the loan while reducing your monthly mortgage premiums–so we recommend increasing your credit score before applying for a home loan.

    Income

    Your income ensures the lender that you earn enough money to pay back the loan on a monthly basis. Lenders may review tax returns, pay stubs, and bank statements to verify your income.

    Your income will be compared to your debts to ensure you can afford to pay back the loan after paying all your other debts, such as car loans, other mortgages and student loans.

    Your debt-to-income (DTI) ratio is calculated by dividing your monthly debts by gross monthly income and is reflected as a percentage. With conventional loans, lenders require a DTI of no more than 36%, but some will go as high as 43%.

    Lenders may be more lenient with VA borrowers, allowing them to have DTIs as high as 55%, depending on certain circumstances like high credit scores and if they’re willing to make a down payment.

    In addition to the VA’s minimum service requirement and your lender’s own loan criteria, the VA also requires an appraisal to ensure the home is safe and prevent borrowers from severely overpaying for a particular property.

    How VA loans work

    The Department of Veterans Affairs doesn’t issue VA loans; they only back them and pay 25% of the total loan value to the lender if you default on the loan.

    Therefore, you’ll need to find a lender that offers VA loans to take advantage of this benefit. The VA is responsible for determining who qualifies for a loan, and there are several types of VA loans to choose from.

    VA loans are considered non-conforming, allowing lenders to provide more leniency and flexibility for eligible borrowers. They have several advantages over conventional rates, including:

    • No down payment required
    • Competitive interest rates
    • No PMI

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    Can you use a VA loan for investment property?

    Now that you understand how VA loans work and who qualifies, you might wonder whether you can use them for investment properties.

    You can use VA loans for investment properties, but there are a few caveats. For example, VA loans are for primary residences only, but there are ways to use them for rental properties since the VA allows several exceptions. In addition, using your VA loan for investment property has several potential challenges.

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    Types of properties

    If you want to use a VA loan for an investment property, you must meet the VA’s occupancy requirements. These mandate that you must use the property as your primary residence, move in within 60 days after closing and live in the home for at least 12 months.

    Additionally, to purchase property with a VA loan, it must be zoned for residential use. Consider the following types of properties:

    Single-family homes

    If you have a large enough home, you can rent out a bedroom as long as you continue living there. This type of real estate investing—also known as house hacking—can help you make your mortgage payments because you get to charge your tenant rent.

    Additionally, there are no rules for how many rooms you rent as long as you still live in the home. The benefits of house hacking include the following:

    • Extra income
    • Building equity faster
    • Tax benefits like deductions for the cost of repairs

    Multi-unit properties

    You can use a VA loan to purchase multi-family homes or multi-unit properties if you live in one of the units.

    Again, as long as you live there yourself, you can use your VA loan to purchase an investment property, allowing you to rent out as many rooms or units as you want.

    One caveat to using your VA loan to purchase multi-unit properties is that they can’t have more than four units. Therefore, you can’t purchase an entire apartment complex. Instead, you’re limited to smaller buildings that only allow three tenants.

    Commercial properties

    You can’t use a VA loan to purchase commercial property because it’s not a primary residence.

    In addition, any commercial buildings that fall outside the occupancy guidelines set by the VA will make you ineligible for the loan.

    Mixed-use

    Mixed-use property is a building considered both residential and commercial. To purchase a mixed-use property with a VA loan, the commercial space can’t exceed more than 25% of the home’s space.

    Like the other properties, the building can’t have more than four units. The VA will also need to ensure that the property remains residential for the life of the loan.

    Rental Income

    Rental income is another challenge when using the VA loan for investment property.

    Income from rented units can help you meet your lender’s income requirements to qualify for a VA loan. For example, if you purchase a single-family home with a rented room above the garage, the lender will consider how much the rent typically is and include it in your income.

    In most cases, lenders consider 75% of the rental income from a property in your income. Therefore, if the property has a rental unit that generates $1,000 per month, they’ll include $750 per month when calculating your total annual income.

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    This rental income can also help lower your DTI ratio, making you more appealing to lenders. For example, if you can’t decrease your monthly debt obligations, a rental unit can increase your income, which lowers your DTI.

    Lenders may have additional requirements for a VA loan used for rental property. For instance, they may require that rental income is verifiable on bank statements to show rental income earned every month and help determine the fair market rent price.

    The policies for factoring in the projected rental income into your loan amount and approval vary by lender. Therefore, not all lenders will consider your potential rental income when they review your actual income; they’d rather see the money you’re guaranteed to make to ensure you can afford to repay the loan.

    Occupancy requirement exceptions

    The VA allows some exceptions to the occupancy requirement for retiring veterans, borrowers who get deployed or work out of town and those with homes that need repairs and/or renovations. Additionally, the VA can make exceptions if your spouse lives in the home full-time.

    Since active duty service members are often transferred, they’ll have to move, but that doesn’t mean they must sell their homes. For example, if they relocate or get transferred, they can keep the home and use it as a rental property as long as they’ve lived there for at least 12 months. If a borrower hasn’t lived in the home for a year, they can ask their loan officer and the VA for an exception to the occupancy rule.

    Another option is to sell the home to another occupant or investor. Transfers are common in the military since members are often relocated. Often, the easiest thing to do is to have a new buyer take over the loan.

    Another exception to occupancy requirements is refinancing with a VA Interest Rate Reduction Refinance Loan (IRRRL). Instead of your lender requiring an occupancy certification, you can assure them you’ve lived in the home for at least one year, allowing you to refinance your home while renting it to a tenant.

    Refinancing isn’t necessary if you want to rent out your home. In most cases, all you have to do is talk to the VA about your circumstances to solve any potential issues with residency.

    Reduced entitlement

    Renting out your home may reduce your entitlement. There isn’t a loan limit for first-time buyers, but there are limits on the second, third or fourth uses of your VA loan benefit.

    The VA sets a maximum size for your second loan based on the size of the first loan and location. Once you pay off your first VA loan, you can restore your full entitlement and borrow again without loan limits.

    Selling your VA loan-financed home

    Technically, all types of homes are investment properties because they appreciate in value over time. While your VA home loan isn’t an investment loan with the sole purpose of helping you invest in real estate, if you’ve lived in the home for 12 months, you can sell it and turn a profit to pay off the loan and restore your VA benefits.

    This process is commonly what house flippers do, although they do it in much less time because they’re not restricted by the VA occupancy requirement. However, if you’ve lived in the house for 12 months, you can sell it for a profit.

    Investment property loan alternatives

    Using a VA loan for investment property is possible, but it’s extremely limited.

    Since occupancy requirements demand that you live in the home for 12 months and use it as your primary residence, using a VA loan for an investment property usually isn’t worth it for most borrowers.

    Instead, there are several other investment property loans to consider, including:

    Conventional

    Conventional loans are ideal for individuals who already own a primary residence with a VA loan. While you can’t use your VA benefits for investment property unless you intend to live in it, conventional loans are more flexible and can be used to purchase any type of property.

    With a conventional loan, you can expect to make a down payment of 20% of the home’s purchase price, but for investment properties, lenders might require as high as 30% down. Additionally, conventional loans are more strict in terms of credit score and income, and potential future rental income isn’t factored into your DTI.

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    Non-QM

    Non-QM loans are more flexible than conventional loans and allow you to qualify based on bank statements and assets instead of pay stubs and W2s, making them ideal for individuals with less consistent income who can still afford their monthly mortgage premiums.

    Mortgage rates on non-QM investment property loans are usually higher than traditional conventional loans but lower than other types of loans like hard money loans. They also offer a more streamlined approval process because they have less stringent requirements.

    DSCR

    A DSCR loan is another type of property investment loan that allows you to qualify based on cash flow instead of personal income or job history.

    DSCR loan approval depends on your debt service coverage ratio (DSCR), which compares your gross rental income versus the mortgage debt and determines whether you can repay the loan.

    Generally, the higher the DSCR, the more operating income you have to cover your debts and pay for additional expenses like repairs and maintenance on rental properties.

    Applying for a VA loan

    So can you use a VA loan for an investment property? Yes, but you should consider the potential challenges you face, such as occupancy requirements and restrictions on the number of units a property can have.

    Remember, you can’t use your VA loan to purchase investment property if you don’t intend to live in it and can’t prove that you’ve lived in it for at least 12 years before no longer using it as your primary residence.

    However, a VA loan may still be right for you if you want to rent out a unit or room in your home or are an eligible borrower who wants to take advantage of the many benefits of a VA loan to fund your private residence without renting it out.

    In either case, applying for a VA loan is simple and consists of the following steps.

    Get your certificate of eligibility (COE) from the VA

    If you’re unsure whether you qualify for a VA loan, you can confirm your status with the VA by obtaining your certificate of eligibility before applying for a mortgage.

    If you know you’re eligible, your lender can secure your COE on your behalf by requesting it with the VA, which may streamline the process.

    The COE is crucial for lenders to help them determine whether the VA approves you for a loan. If you’re unsure of your status and don’t want to apply for a loan until you know you’re eligible, you can request the COE yourself before contacting a lender.

    Apply for preapproval

    Mortgage preapproval is crucial at the beginning of the process because it can tell you whether you qualify for the loan and how much a lender may be willing to give you.

    Preapproval can tell you your home affordability to help you start shopping within your price range. Sellers prefer to work with serious buyers who have obtained a preapproval letter.

    A mortgage preapproval doesn’t always mean that you will be approved for the loan or a certain amount when it comes time to fill out the complete mortgage application, but it can give you an idea of how likely you are to be approved.

    Therefore, don’t be surprised if a lender approves you for a lesser amount, especially if your financial situation has changed since you received your initial preapproval. The actual application approval process considers a specific property and appraisal to determine how much you qualify for.

    With a simple 10-step mortgage process, Griffin Funding strives to make applying and securing a home loan easy, transparent, and quick.

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    House hunt and make an offer

    Armed with a preapproval can help you look more appealing to sellers.

    The home must meet the VA’s minimum property requirements to get approved for the loan. When you’ve found a home you like, you can make a purchase offer and allow the seller to accept, reject or counter.

    Once you agree on a price, your real estate agent or attorney can create a sales contract before you apply for the VA loan.

    Application

    Once you sign a sales agreement, you can apply for a VA loan with your chosen lender and undergo appraisal and underwriting.

    An underwriter will verify your financial information to ensure you qualify for the loan based on the lender’s requirements. At the same time, the VA conducts an appraisal to approve the home for purchase.

    Closing

    Once the home passes the VA’s appraisal and you’re approved for the loan, you can lock in your interest rate and close. This means paying closing costs, including your VA funding fee.

    More VA options

    While there are limitations to what types of property you can use your VA loan for, there are several other types of VA loans worth considering, especially if you already have a VA loan.

    Apart from VA purchase loans, Griffin Funding offers the following VA loan refinancing options.

    VA cash-out refinance

    A VA cash-out refinance loan allows you to refinance your home and leverage its equity for cash, giving you more access to money when you need to pay off debts or make a large purchase.

    The VA limits what you can use your VA cash-out refinance for. For example, you can’t use it to finance an investment property.

    VA streamline refinance

    VA streamline refinance loan, also known as IRRRL, allow you to refinance your existing home loan. Refinancing your home loan can get you a lower interest rate and monthly payment.

    Getting a VA loan

    A VA loan is an appealing offer for eligible borrowers who want to avoid a large down payment and PMI.

    Using a VA loan for an investment property ultimately depends on the type of property. You must also adhere to the VA’s occupancy requirements.

    However, you may be able to use a VA loan for rental properties with up to 4 units and house hack to reduce your mortgage payments. The VA allows some exceptions, so if you’re ever unsure, you can contact them or your loan officer for more information.

    Ready to use a VA loan to purchase property? Get a quick quote today.


    References

    1. Chapter 12 Minimum Property Requirement Overview – Veterans Affairs. https://www.benefits.va.gov/WARMS/docs/admin26/m26-07/Ch12_Minimum_Property_Requirement_NEW.pdf.
    Bill Lyons

    Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.