VA Loan For Investment Property: Can You Use One?

VA home loans are a popular loan option for qualifying active-duty service members and veterans, along with eligible surviving spouses. These loans are backed by the U.S. Department of Veterans Affairs (VA) and typically require no down payment. They also offer competitive interest rates and other special benefits.

If you qualify for a VA loan, you may be wondering if you can use it to purchase an investment property.

Let’s answer this question and then delve into the basics of the VA entitlement so you have a clear understanding of what you can and can’t do when it comes to buying an investment property with a VA loan.

VA loans are intended to be used for primary residences, meaning that the borrower has to live in the home for the majority of the year. However, this doesn’t mean that using a VA loan for an investment property is completely off the table. A couple of exceptions do exist that allow you to use a VA loan to invest in real estate.

We’ve established that you have to use a VA loan for your primary residence, but there are still some ways to use your primary residence as an investment property to help you earn a little extra income. Let’s take a look at some creative ways that you can do this.  

Extra Space In Your Primary Residence

If you happen to have a property big enough for you to rent out a bedroom or even a guest house, you can always do this to earn some rental income on the side. As long as the property is your primary residence, how you rent out your rooms is up to you, and you can use a VA loan to fund the purchase of the property. If you plan on going this route, remember to get your mortgage approval early on in the process. This will give you a better idea of how much home you can afford, which can give you a good idea of how many rooms you could potentially rent out when viewing properties you’re interested in. 

A 1- To 4-Unit Property

You can use a VA loan to purchase a single-unit home, a duplex, a triplex, or a quadplex as long as one of those units is your primary residence.

So like in the example we just mentioned, you can use a VA loan to purchase an investment property. As long as you live there and it’s your primary residence, you can rent out rooms or units at your discretion.

Now that you know whether you can use a VA loan for an investment property, let’s take a look at VA entitlements. The VA doesn’t lend money. However, it guarantees up to a quarter of your loan, which is called an entitlement. This is crucial to the benefits of a VA loan, including zero down payment. You can find your entitlement information on your Certificate of Eligibility (COE). Make sure you check it before you start planning costs.

VA Loans Are Assumable Mortgages

VA loans are assumable, meaning that someone can buy a home by taking over the seller’s VA mortgage loan. This often allows the buyer to benefit from financing with a lower interest rate if market rates are higher.

Do You Have To Qualify For A VA Loan Assumption?

In the case of VA loans, a buyer doesn’t have to be a military or service member to qualify for a VA loan assumption. However, depending on the loan, the lender may need to get it approved by the Regional VA Loan Center. Because of this, it may take more time to process.

One instance where the seller doesn’t need lender approval is when a buyer comes across a freely assumable mortgage that applies to any VA loan closed before or on March 1, 1988. Without approval, the seller may still have to make payments if the buyer fails to do so. These loans also come with a cost drawback since loans from the late ’80s usually have higher interest rates.

Keep in mind: You can’t restore your entitlement unless the buyer is an eligible veteran. They must substitute their eligibility for yours.

The Basic Entitlement

Basic entitlement is the first part of VA entitlement. You have basic, or full, entitlement if you never borrowed a VA loan before, or if you fully restored it. Traditionally, it guarantees 25% of your total loan amount up to $144,000.

But that doesn’t actually limit your potential entitlement. It just means that the VA’s maximum guarantee for loans up to and under $144,000 is $36,000. There’s additional, or bonus, entitlement for loans exceeding that amount.

Bonus Entitlement

The VA bonus entitlement, sometimes called additional entitlement or tier 2 entitlement, refers to any loan over the $144,000 basic entitlement. It’s additional borrowing power that helps you purchase homes at a higher price point. Using your bonus entitlement, you can borrow over $144,000, and the VA will guarantee up to 25% of that amount.

VA Funding Fee

It’s important to note that eligible borrowers must pay the VA funding fee. This fee essentially covers the cost of the VA Loan program and is 1.25% – 3.3% of the loan amount.

The funding fee cost depends on the size of your down payment, whether you’re refinancing or buying, if 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 can’t pay the fee upfront, you can roll it into your mortgage.

Loan Limits

Loan limits don’t impact military borrowers with full entitlements. It only comes into play if you have a VA partial entitlement when you buy your second home. The loan limits in this situation depend on the county where the property is located. That means 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 out your county loan limits here through the Federal Housing Finance Agency.

If your loan amount exceeds $144,000 and you’re using remaining entitlement, you may have to cover a down payment. A VA-backed loan may help you borrow above your county loan limit, though, in that case. But in the end, your lender needs to approve you for the loan amount.

As mentioned above, one of the benefits of a VA loan is being able to reuse its loan benefit. It’s available as long as the qualifying service member maintains their eligibility and qualifies with a lender. So, you can buy a second home without necessarily worrying about a use limit.

You can even have two VA loans at the same time in some situations. But it usually requires a service member to receive permanent change of station (PCS) orders.

Repaying Your Original VA Loan

In most cases, though, your second VA loan follows the repayment of the first. You also have to pay off the original home if you want your full entitlement restored. If not, you can use the remaining entitlement to cover your new loan.

Transitioning Your VA Loan 

Alternatively, you may still have an unpaid loan on your first home that you plan to keep. While you’ll need to qualify for both payments, your original property with an outstanding VA-backed loan can be considered a second home.

Just be mindful of the VA’s loan occupancy requirements. If you buy a property, you must move in within 60 days. However, anyone on active duty can have their house or dependents act as a stand-in.

VA loans make homeownership affordable and accessible to military service members and surviving spouses who meet certain eligibility requirements. With a VA loan, the VA backs your loan up to a certain percentage. As a result, the lender is protected, and you don’t have to pay as much for a home.

Keep in mind that if you use a VA loan to purchase an investment property, you must treat that property as your primary residence. You can rent out a bedroom or even a guest house, but you’ll need to live there to meet VA guidelines.

If you’re ready to use a VA loan to buy property, apply for your initial approval with Rocket Mortgage^® today. This way, you’re ready to make an offer when you find the right opportunity.