Buying A Second Home With A VA Loan

VA loans, offered through the Department of Veterans Affairs (VA), have several benefits for qualifying clients to purchase a home, including the ability to buy without a down payment and more flexible credit score and debt requirements.

Life in the military sometimes means a lot of moving around, so the ability to use a VA loan to purchase multiple homes over the course of a lifetime is ideal. But what happens if you want to purchase a new residence with a VA loan while keeping your old one?

Using a VA loan for a second house or even for an investment property is possible, but there are some things you should know. Let’s take a closer look at how you can use a VA loan to finance the purchase of a second home.

Can You Use A VA Loan For A Second Home?

Yes, you can use a VA loan to buy a second home, but you will need to follow certain requirements.

In lending and in life, the main definition of second home is a vacation home that serves as a getaway from the everyday hustle and bustle. Because VA loans are intended to help people purchase or refinance a primary residence, you will have to follow the VA loan occupancy requirements. This means you can’t legally purchase a home with a VA loan that you don’t intend to occupy for most of the year.

Purchasing a primary residence means you have to move in within 60 days, with a few possible exceptions that we’ll touch on later.

Examples Of Buying A Second Home With A VA Loan

Let’s take a look at a few scenarios you might run into when trying to buy a second home with a VA loan.

If Your First Home Is Paid Off

The easiest scenario to discuss is what happens if you’ve already paid off your original VA loan and want to keep the property that was originally secured by the VA backing. If this fits you, you should know that you can get a one-time restoration of your full VA entitlement in order to get another VA loan.

If Your First Home Isn’t Paid Off

If your home isn’t paid off and you’re intending to keep it permanently or even while you’re looking to sell, your original property backed by a VA loan can be transitioned into a second home. However, you do have to qualify with both payments.

If you plan to keep the property permanently, you should know that your ability to get another VA loan may be impacted by whether you have any remaining entitlement dollars left. We’ll get into how this works from a technical perspective later on.

If You Plan To Sell Your First Home

If you sell the property, you should know that a VA loan is an assumable mortgage. This means that the person buying the house from you can assume the terms of your loan and pick up the payments without paying it off.

If you sell to someone who isn’t VA eligible under an assumption, your VA entitlement is lost because it’s still tied to the old house. On the other hand, if you sell to another person with a VA approval with an assumption, their entitlement is substituted for yours. You can then buy a new house with a full VA entitlement.

VA Entitlement

We’ve talked about entitlements a bit, so we’ll get into this a bit more later on, but a VA entitlement is the amount that the VA will pay the lender in the event that you default on your loan and the mortgage lender has to make investors whole.

You’ll also occasionally hear the concepts of basic and bonus entitlements talked about. Every veteran is entitled to a basic entitlement of $36,000. This shows on your Certificate of Eligibility as a whole entitlement. However, that $36,000 figure is based on the average home price being $144,000, which is rarely the case anymore. That’s where bonus entitlement comes in.

In addition to the basic entitlement, the VA will cover 25% of the purchase price above $144,000. This is your bonus entitlement. It’s worth noting that things work a little differently if you only have partial entitlement left. This situation occurs when you get a new VA loan without paying off your old one. We’ll have more on bonus entitlement below.

Using A VA Loan For An Investment Property

Because VA loans are intended for the purchase of primary residences, you can’t buy a property for the express purpose of having it be a rental property. However, you can convert that property into an investment property if you move at some point. If the property is being converted, it’s a good idea to talk to your lender.

They may ask you for lease agreements and do an appraisal to make sure proposed rents are supported if you plan on making future payments with rental income. Once converted, you can use this income to help buy your new home, after 25% is subtracted as a vacancy factor in case you have to find new tenants.

The far more common way to generate rental income is not by having it be a rental property at all, but rather buying a multiunit primary property. You live in one unit and rent out the others. This is more of a standard VA transaction.

Lenders will have different policies, but at Rocket Mortgage^® you need to have 6 months’ worth of reserves in order to qualify with proposed rental income, meaning you could make the payment for 6 months if there was a loss of income. Lease agreements must also be in place.

Using A VA Loan For A Vacation Home

A VA loan can only be used to purchase a primary home. However, there are a couple of scenarios in which a vacation home can be purchased while still following the rules.

As noted before, you might move to a new service station with a new primary residence, but choose to keep your other home as a vacation destination. Similar to investment properties, you can convert a primary home and buy a second home as long as you can afford to make both mortgage payments.

Secondly, you might purchase a second home with the intention of moving there after you retire. Ordinarily, you have to occupy a primary residence within 60 days of purchasing a property. However, active service members who will retire within a year can give a date when they anticipate moving into the property. Your spouse is also able to stand in as an occupant if you’re on active duty.

Understanding Bonus Entitlements

VA home loans are different in that in most cases, you’re not going to be required to come up with a down payment. However, it’s also a government loan program with its bill paid by the American taxpayer. If a client defaults, a minimum of 25% of the loan amount is guaranteed by the federal gov