Can You Use a VA Loan for Investment Property?

The VA loan program, established by the U.S. Department of Veterans Affairs, is a powerful benefit available to veterans, active-duty service members, and certain members of the National Guard and Reserves. The program offers several advantages, including no down payment, no private mortgage insurance (PMI), and competitive interest rates. However, one of the most frequently asked questions is whether a VA loan can be used to purchase investment property.

Understanding VA Loans

VA loans are primarily designed to help veterans and active-duty service members purchase a primary residence. The underlying principle of the VA loan program is to assist in the transition to civilian life by providing veterans with a pathway to homeownership. As such, the program is structured to support the purchase of a home that the borrower intends to live in as their primary residence.

Restrictions on Using VA Loans for Investment Properties

The VA loan program has specific rules and regulations that limit its use for investment purposes. The primary requirement is that the property purchased with a VA loan must be owner-occupied. This means that the borrower must intend to live in the property as their primary residence within a reasonable time after closing the loan.

The VA defines a reasonable time as within 60 days of closing. In certain circumstances, this period may be extended, such as when a service member is on deployment and cannot immediately occupy the property. However, the borrower must still demonstrate the intent to occupy the home as their primary residence upon their return.

Can You Convert a VA-Financed Property into an Investment Property?

While the VA loan program does not allow for the purchase of investment properties outright, there are scenarios where a property initially purchased with a VA loan can be converted into an investment property. This typically happens when a borrower who has used a VA loan to purchase a primary residence decides to move. In such cases, the borrower can rent out the property, thus converting it into an investment property.

It's important to note that the VA does not require the loan to be paid off or refinanced when converting the property to an investment property. However, the borrower must still meet the occupancy requirements at the time of purchase.

Using Rental Income to Qualify for a VA Loan

In some cases, borrowers may be able to use rental income from a property to qualify for a VA loan. This is particularly relevant for multi-family properties, such as duplexes, triplexes, or fourplexes, where the borrower intends to live in one unit while renting out the others.

The VA allows borrowers to count rental income from the other units as part of their income, provided they can show a history of property management or rental income. This additional income can help the borrower qualify for a larger loan amount, making it easier to purchase a more expensive property.

Can You Purchase a Multi-Family Property with a VA Loan?

One of the ways veterans and service members can leverage a VA loan for investment purposes is by purchasing a multi-family property. The VA allows for the purchase of multi-family properties with up to four units, provided the borrower occupies one of the units as their primary residence.

This strategy allows the borrower to live in one unit while renting out the other units, effectively turning the property into a source of income. The rental income generated from the other units can be used to offset the mortgage payments, potentially allowing the borrower to live in the property at a reduced cost or even mortgage-free.

House Hacking with a VA Loan

The concept of "house hacking" has become increasingly popular among real estate investors, and VA loan borrowers can take advantage of this strategy as well. House hacking involves purchasing a property, living in part of it, and renting out the rest to cover the mortgage payments.

With a VA loan, house hacking is most commonly done with multi-family properties, but it can also be done with single-family homes by renting out rooms or converting the property to include an accessory dwelling unit (ADU). This strategy allows veterans and service members to build wealth through real estate while still adhering to the VA's occupancy requirements.

VA Loan Assumptions: A Pathway to Investment Property

Another way to use a VA loan in an investment scenario is through the assumption of an existing VA loan. VA loan assumptions allow a new borrower to take over the terms and remaining balance of an existing VA loan. This can be an attractive option for both the seller and the buyer, especially if the loan has a lower interest rate than current market rates.

If the buyer intends to use the property as an investment, they can assume the loan without needing to meet the VA's strict occupancy requirements, as these apply only at the time of the original loan. However, the new borrower must still meet the VA's eligibility requirements and the lender's credit and income standards.

Refinancing a VA Loan for Investment Purposes

Once a veteran or service member has occupied a property purchased with a VA loan for a reasonable period, they may have the option to refinance the loan into a conventional mortgage. This can be a strategic move for those looking to convert the property into an investment without the restrictions of the VA loan program.

By refinancing into a conventional loan, the borrower can free up their VA loan entitlement, allowing them to use it to purchase another primary residence. The original property can then be rented out as an investment property, providing a source of passive income.

VA Loan Entitlement and Investment Properties

VA loan entitlement refers to the amount of money the VA will guarantee for a loan. Veterans and service members have a basic entitlement of $36,000, but this amount can be higher depending on the loan amount and the borrower's eligibility.

It's important to note that while a VA loan cannot be used to purchase an investment property directly, a borrower who has used their VA loan entitlement to purchase a primary residence may be able to purchase another property using their remaining entitlement. This is possible if the borrower has not used their full entitlement or if they have paid off the original loan and restored their entitlement.

In some cases, borrowers can have multiple VA loans at the same time, provided they meet the occupancy requirements and have sufficient entitlement remaining. This could allow for the purchase of a second primary residence while converting the original property into an investment.

Conclusion

While the VA loan program is not designed for investment purposes, there are several ways veterans and service members can use it to their advantage in building wealth through real estate. By purchasing multi-family properties, converting primary residences into rentals, or assuming existing VA loans, borrowers can create opportunities for passive income and long-term financial stability.

It's essential for borrowers to fully understand the occupancy requirements and other restrictions of the VA loan program before pursuing these strategies. Consulting with a knowledgeable lender and real estate professional can help ensure that veterans and service members make the most of their VA loan benefits while adhering to the program's guidelines.

In summary, while you cannot directly use a VA loan to purchase investment property, there are various legal and strategic methods to achieve similar outcomes within the program's regulations. For veterans and service members looking to invest in real estate, understanding these options can open doors to financial growth and success.