The question of using a VA loan for an investment property is one that intrigues many veterans and eligible borrowers. As a unique home loan offering from the U.S. Department of Veterans Affairs, VA loans come with several attractive benefits for property purchases. But can these advantages be leveraged for real estate investment purposes? Let’s explore.
Can You Use A VA Loan For An Investment Property?
VA loans are designed primarily to help veterans purchase their own homes. However, the idea of using these loans for investment property purposes is not far-fetched.
Understanding VA Loan Investment Property Requirements
The central requirement for VA loans is that the borrower must occupy the purchased property as their primary residence. While this condition might seem limiting for investment ambitions, there are legal and creative ways around it that we’ll explore shortly.
Credit Requirements and Loan Entitlement
The credit requirements for VA loans are typically more lenient compared to conventional loans. VA loans also do not have a maximum limit. So, what is the minimum VA loan credit score? but there is a limit to the amount the VA guarantees, known as your entitlement. Understanding your entitlement is crucial when planning to use a VA loan for investment.
Can you buy a multiunit property with a VA loan?
Purchasing a multiunit property is one strategic way to utilize a VA loan for investment.
Purchasing a Multiunit Property with a VA Loan
A veteran or eligible borrower can purchase a multiunit property (up to four units) using a VA loan, provided they occupy one of the units as their primary residence. This way, they can generate rental income from the remaining units, thereby turning the property into an investment.
Multiunit Property Occupancy
Meeting the occupancy requirements when using a VA loan for a multiunit property is crucial.
Navigating Occupancy Requirements for Multiunit Properties
The VA mandates that borrowers occupy the home within a reasonable time, typically within 60 days after closing the loan. However, for multiunit properties, borrowers only need to occupy one of the units to fulfill this requirement.
Can a VA loan be used for commercial property?
Interestingly, the question of a VA loan for investment property isn’t restricted to residential property. So, can a VA loan be used for commercial property? Typically, VA loans are intended for residential properties. However, if the commercial property you’re considering has residential units that you plan to use as your primary residence, then a VA loan might be an option. This means you could purchase a mixed-use or commercial property with residential units using a VA loan, provided you reside in one of the units.
Understanding The VA Loan Entitlement
A VA loan for investment property is not a straightforward affair but requires understanding several elements, one of which is the VA Loan Entitlement. This term, central to VA loans, directly impacts your loan investment capabilities.
VA Loans Are Assumable Mortgages
VA loans come with a unique feature: they are assumable. This means that a home buyer can take over the seller’s VA mortgage loan instead of getting a new one. If the current market interest rates are higher, the buyer could benefit from a lower rate under an va loans assumable mortgage.
Interestingly, for a VA loan assumption, the buyer doesn’t necessarily need to be a military service member. However, depending on the specific loan conditions, approval from the Regional VA Loan Center may be necessary, potentially extending the process timeline.
Particularly, VA loans closed before or on March 1, 1988, known as freely assumable mortgages, don’t require lender approval. Yet, it’s important to note that in cases where the buyer fails to make payments, the seller may still bear the responsibility. Additionally, loans from the late ’80s typically bear higher interest rates, which could be a downside.
It’s crucial to remember that if you wish to restore your entitlement, the buyer must be an eligible veteran who can substitute their eligibility for yours.
The Basic Entitlement
The basic entitlement is the first layer of VA entitlement. If you’ve never borrowed a VA loan before or you’ve fully restored it, you have a full or basic entitlement. This guarantees 25% of your total loan amount up to $144,000.
However, this doesn’t limit your potential entitlement. It simply means that the VA’s maximum guarantee for loans up to and under $144,000 is $36,000. There’s an additional entitlement, also known as bonus entitlement, for loans exceeding that amount.
Bonus Entitlement
The bonus entitlement, sometimes referred to as the additional or tier 2 entitlement, comes into play for loans exceeding the $144,000 threshold of the basic entitlement. This additional entitlement offers you extended borrowing power, allowing you to purchase higher-priced homes. With the bonus entitlement, you can borrow over $144,000, and the VA will guarantee up to 25% of the loan amount.
One point to bear in mind is the VA funding fee, a cost that eligible borrowers need to pay. This fee essentially covers the cost of the VA Loan program and ranges between 1.25% – 3.3% of the loan amount.
The funding fee cost is determined by several factors, including your down payment size, whether you’re refinancing or purchasing, whether it’s your first time borrowing a VA loan, and your type of service. Veterans with a service-related disability, active-duty Purple Heart recipients, and surviving spouses are exempt.
If you’re unable to pay the fee upfront, you have the option to roll it into your mortgage.
Loan Limits
Loan limits don’t directly affect military borrowers with full entitlements. They become relevant if you have a VA partial entitlement when you buy your second home. In such cases, the loan limits depend on the county where the property is located. Essentially, the Department of Veterans Affairs will pay your lender up to 25% of your county loan limit minus the entitlement amount you already used.
You can check your county loan limits through the Federal Housing Finance Agency.
If your loan amount exceeds $144,000 and you’re using remaining entitlement, you might have to make a down payment. However, a VA-backed loan could help you borrow above your county loan limit. Yet, it’s vital to remember that ultimately, your lender needs to approve you.
What If You’ve Bought A Home With A VA Loan Already?
In the sphere of VA loans and real estate investment, the question often arises: what if you’ve already bought a home with a VA loan? Can you use your VA loan benefits again for another property? The answer is yes, under certain circumstances.
VA loan entitlement is reusable. If you’ve paid off your previous VA loan in full and sold the property, you can use your full VA loan entitlement again. This is often referred to as “restoring” your VA loan entitlement.
But what if you still own the property? This is where it gets a bit tricky. Partial entitlement is available if you’ve used less than your total entitlement. The remaining entitlement and the VA’s county loan limits will determine if you can get another VA loan.
There’s also a one-time “second-tier” entitlement, which can be used without selling the home purchased with a VA loan. However, there are specific rules and requirements to use this. You may also have to meet certain credit and income criteria to secure a second VA loan.
Finally, there’s the option of refinancing the property with a VA Interest Rate Reduction Refinance Loan (IRRRL) if you plan to rent out the property you initially purchased with a VA loan. This could potentially lower your interest rate, making your investment property more profitable.
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