Veterans have the fortunate benefit of VA home loan financing. This 100% financing program offers flexible guidelines, making it easy for veterans to buy a primary residence. What about an investment property, though? Can you use VA financing on this type of home?
Unfortunately, the answer is ‘no’ that you can’t use VA financing on an investment property. But, there is a way around it. A veteran can buy a multi-unit property and use it as an investment property, but you must satisfy certain conditions.
You Must Live in the Property
The only way you can secure VA financing for an investment property is to certify that you will live in the property. If you buy a multi-unit property, you can live in one unit and then rent out the other units. This way you satisfy the VA’s requirements of living in the property, but you still get the benefit of buying an investment property. You can use the rent you receive from your tenants to help you pay the mortgage on the property.
You Must be Able to Afford the Mortgage
Even though you may collect rent on the property, you may not be able to include it in your qualifying income. Lenders can’t use projected income. They also can’t use income that has the potential to not be there in the future. For example, if you’ve never owned a rental property, you don’t have the experience necessary to use the rental income even if you have an executed lease.
Most lenders want to know that you can afford the loan on your own without the rent. If you can’t, the lender is at high risk of default. Showing that you have a debt ratio that doesn’t exceed 43% and that you have enough disposable income after paying your bills will give you the best chance at approval.
The Property Must Meet VA Guidelines
The VA has specific property guidelines each property must meet. The VA’s property guidelines help the lender know that the property is safe, sound, and secure. The VA has what they call Minimum Property Requirements. While they sound difficult, they aren’t anything out of the ordinary:
- All systems must be in good working order, including electrical, plumbing, and sewer systems
- The roof must have at least 3 – 5 years left on it
- The roof must not have any leaks or other defects
- The property must be easily accessed from the street year round
- The property must not have any pest damage
- The property must not have any mold or mildew
- The stairs must be safe and stable
- All windows and doors must be intact and in good working order
These stipulations are in place in order to ensure that a home is safe and sound for veterans, even if they are going to rent out one or more units.
Renting Out a Home Bought With VA Financing
You can also get around the VA financing rule regarding investment properties with the VA streamline refinance program. While you have to certify that you will use the property as your primary residence when you buy a home with VA financing, you don’t have to certify this when you refinance with the VA IRRRL program. You must certify that you once lived in the property as your primary residence, but you don’t have to live there moving forward.
If you decide to move out of your current home, you may be able to rent it out and keep the VA financing on it as long as you refinance with the VA streamline loan. You can then use your remaining entitlement to purchase a property for your primary residence.
The bottom line is that it is possible to buy an investment property with a VA loan, just not in the traditional manner. If you are buying a home, you can only buy a multi-unit property and live in one of the units. Once you live in the home, though, you may be able to rent it out and buy another home with VA financing.