The VA loan is a great way to acquire a rental property but a qualified buyer must abide by VA requirements to make this happen. This includes physically moving into the property in a reasonable amount of time.
So you need or want to turn your VA loan purchased home into a rental property because you cannot sell or maybe you are looking to use it as an investment. Let’s dig into understanding what it takes to make sure that you follow the proper instructions and timelines to turn your property into a rental. Also, note if the property is more than one unit the VA does allow for you to live in one unit and immediately start renting the other units.
As with any money making adventure there are many details you need to get into. In this article we will lightly touch on the things that are most important for you to take note of but remember there are many professionals out there that can help you with making sure you check and consider all options specific to your circumstances.
Can a VA loan be used to buy a rental property?
VA loans can be used to buy a rental property but the VA loan must first be executed to buy the property that one hopes to turn into a rental for their primary residence. So what this means is that if you find a property that you think would make a great rental property you first have to move in and live there. You cannot find a property and use the VA loan as a way to acquire the property as a straight rental or investment property. So if you are not planning on moving into the property, do not start with the VA loan. Let your lender know what you are looking to do and make sure you qualify for the loan.
What you can do is buy a house with the VA loan, move into it and then have a change of life needs and then move and it can become an income producing property, also known as a rental! If the numbers work this could be a great option to make an income while also allowing someone else to pay the mortgage.
What types of rental property can be purchased with a VA loan?
An initial purchase of a single-family home or a property with up to 4 units is allowable by the VA loan program. A borrower can use their military member or qualified VA loan benefits to buy but they must first move into the home as a primary residence.
VA Home Loans Occupancy Requirements
A rental property with a VA loan first has to be lived in by the VA loan beneficiary for 12 months. This is listed in most terms of a VA loan, ask your lender what their minimum requirements for you are. In some cases when there are forced movements with orders to another base or retirement a VA loan borrower can execute another loan. It is important to run your situation by your loan officer to get the details on your options. It can happen where the home with a VA loan needs to be vacated but the borrower does not want to sell. In most cases this is where the owner can decide to rent the property. The borrower does not have to refinance the property at this time but they should know that the VA loan on this property will continue to take up their VA entitlement.
How many units can I buy with my VA loan?
When a buyer executes a VA loan for a duplex, triplex or a quadplex the other units are immediately allowed to be rented out. Defining “other” in this situation still implies the Veterans Affairs’ mandate that when using a VA loan the borrower using the VA loan benefits must reside in the property as their primary residence for the duration of twelve months in most cases. There is not a penalty for the loan holder to rent out the other properties attached and purchased with the loan as the entire property should be financed as one property, multiple units.
Renting your home after a VA purchase
Renting your property if there is more than one unit attached to the property is an immediate allowance by the VA. If the property is a single family home the requirement by the lender and VA is clear, the borrower must show and qualify for the loan with the intent to move into the property after closing within a reasonable amount of time. This means that you can purchase a home prior to your arrival to a duty station. Use that travel time alloted by the government, typically 10 days for traveling around to find a new home and get out there and shop! Typically this time allowed comes once the orders are produced. The lender will want to use the orders for a military member that is not in the area they are trying to buy in to show that it is reasonable for the lender and VA to assume the member needs housing in that area.
Be reassured that if you follow all of the right steps, orders are provided and the lender has no reason to believe that you bought a home that you are not planning on living in, there are workarounds if life happens and the military sends you somewhere else. This is a very important item to talk to your lender about. If you end up in this situation make sure to keep all of your documents in order in the case that the VA does an occupancy check.
Renting your home after a VA refinance
With an option to refinance your home there are a couple of different options when it comes to VA loan usage. If you do a home refinance using an Interest rate reduction refinance loans (IRRRL) then your loan will still be in the VA loan category and you will receive extra income if your loan payment is less than your market rent you will charge. If you decide to refinance out of the VA loan you will need your lender to help you shop different loan programs. With a VA loan being taken out of the VA loan program you will move to something like a conventional loan and the great thing about this is that even in some cases with less desirable terms you can use your VA loan benefits again on another purchase. Qualifying with location and using the home as a primary residence of course but just think you could have another loan with zero down!
Does rental income help to qualify for a VA loan?
To maximize your VA loan benefits you can absolutely use the rental income from one property to qualify for the next purchase. Lenders will request documents such as leases, tax returns, proof of deposit, etc when considering your rental income as part of your application.
How long do you have to occupy a VA loan home before renting?
Before renting the lender will want you to fully occupy the property for a typical period of twelve months. With this being said if circumstances change and you need to move from the property communicate your situation with your lender. Lenders will usually work with borrowers who pay on time and provide reasonable documentation and rationale as to why they are looking to relocate. Remember that nothing with lenders is set in stone and they do understand that things change. Examples that may leave a person or family needing to change location are, marriages, divorces, kids joining the family, moving, school needs and many more other life changes that are absolutely necessary to drive a move. If any of these items happen and you need to relocate and want to keep the home, call the bank or lender that you are currently paying your mortgage monthly payments to and let them know your plans. If the time is past the 12 months and you need to move, look up the market rent averages and get to work renting your new investment out.
How long do you have to live in a VA home before you can sell?
You can sell your home without limitations on timelines if you have used a VA loan. VA loans are not intended to be for investment purposes so the lenders do prefer you to hold the property for a preferred six to twelve months but as we all know life is unpredictable so if you do need to sell and you can financially after all of the fees that are added to the loan which you will need to be prepared for there should not be anything limiting you from selling your home like with any other loan type. Remember at the closing table you did incur closing costs which in a sale that does not allow you to pay any of the principal down you may need to be prepared to bring cash to the table.
Does the VA check occupancy?
In most cases the documentation that lender collects will show that the borrower has intent to occupy the property as a primary residence which is required by the VA. If there is a question as to the borrower with the VA loan benefit moving into the property or not there can be an occupancy check completed and the lender can call the note in question to be adjusted per the loan terms.
It may reduce your entitlement
If a VA loan is refinanced or used to purchase the property the entitlement of the VA backed borrower will be reduced as this will be placed on the certificate of eligibility (COE). The COE is a document that allows the lender to calculate if the borrower is eligible for using a VA loan with their VA benefits and secondary use.
Using a VA loan specialized lender is key when buying with the VA loan because the calculations that will be used to determine the VA loan eligibility and benefits left when trying to use a COE on the first, second and even third times is where you need someone to look at your overall situation. The things that come into play when using a VA loan after the first time are not just if you are eligible but also what will your funding fee be, can you reduce it, if you are eligible for other loans would those be better more cost effective products and even potential loan limits. Do not be afraid to get with a lender and have them take time to run all scenarios for you.
You may need new a homeowners insurance policy
Insurance to cover your property is essential. The homeowner when renting out the property will need homeowner’s insurance that will specifically cover the property. The landlord will need to make sure that they speak to the insurance company and let them know the property is being rented out. The insurance coverage will be changed from an owner occupied to a renter occupied policy.
Personal property of the tenants will need to be covered by a renter’s policy that the tenant will need to ensure they have. Make sure that your lease clearly covers that the tenant is responsible for having a renter’s insurance policy in place.
Do I have to document rental income with a VA loan rental?
Just like any taxable income you do need to document rental income with not only a VA loan rental but any rental. Your tax advisor can help you fill out your forms to specifically show what income and or losses you take on a property. Ensure your bank statements are clear for the property so you can show what you received financially and what you had to spend for it.
Do I have to refinance before I can rent out my VA home?
You do not have to refinance your home before you rent it out if it was purchased with a VA loan. Eligible buyers are allowed to use their VA benefits to buy both single-family homes and multi family and primary residences. Interest rate reduction refinance loans (IRRRL) do allow members to refinance to get better rates after 6 months from the last refinance or the purchase of the property but are not mandatory.
Using a VA loan for a rental can be done. With the proper timeline and ability to live in the property first a qualified member can execute the purchase and later turn the property into a rental. Make sure to speak to your lender to ensure that you are qualified to use your benefits to purchase the property. If the numbers work, you can easily turn your property into a money making investment. Happy house hunting!
