If you are a veteran, you may be eligible for a VA loan. This means 100% financing and flexible guidelines. However, there’s one big stipulation – you must live in the property. Does this mean you cannot buy an investment property with VA financing?
There is one loophole that we will discuss with you here. If you qualify, it could be a great way to get your experience as a landlord.
Buying a Multi-Unit Property
So here’s the secret. You can buy a multi-unit property with VA financing. This means a 2, 3, or 4-unit property. The key, however, is that you live in one of the units as your owner-occupied property. This is because the VA loan is meant to help make it easier for veterans to secure a place to live. It’s not intended for borrowers to purchase a home for income-making purposes.
If, however, you are able to qualify for a multi-unit property, you may secure the loan you need and still collect rent. Keep in mind, though, you cannot use the rent as qualifying income for the loan. In other words, you must qualify with your regular income in order to get the financing.
Qualifying for the VA Loan
Qualifying for a VA loan starts with proving your eligibility for the program. This differs from qualifying. You must prove to a lender that you have a Certificate of Entitlement. This means you did all of the following:
- Served enough time in the service to be eligible for the program
- Had an honorable discharge
If you served during peacetime, you must have served at least 181 days in order to be eligible. If you served during wartime, only 90 days of service is required. If, however, you are or were in the Reserves or National Guard, you’ll need 6 years of service before you are eligible.
Actually qualifying for the VA loan means you need the following:
- Minimum credit score of 620 (some lenders may require a higher score)
- Maximum total debt ratio of 43% (this includes the new mortgage and any existing monthly debts)
- Stable income
- Stable employment
You’ll need to provide a lender with your last few paystubs covering the last month of employment. You’ll also need to provide your W-2s for the last 2 years and contact information for your employer. Lenders must confirm that your employment is consistent and likely to continue for the foreseeable future.
Each lender can have their own qualifying requirements on top of what the VA requires. The lenders fund the loans – the VA does not. You may find some lenders with simple guidelines and others that have strict requirements that make it harder to get the VA loan, including buying a multi-unit property.
What Does the VA Do?
You might wonder what the VA’s role in all of this is if the lender funds the loan and makes up their rules.
The VA plays a vital role, though. They guarantee the loan for the approved lenders on their list. This means the VA promises to pay the lender back a portion of your loan if you default. This is why lenders are able to provide such flexible guidelines.
If you think about it, lenders can provide you with 100% financing for a property you are going to rent out, as long as you live in one unit. That’s a big risk for lenders. With the VA’s guarantee, though, the lender can rest assured that they will see at least a portion of your loan amount if you default on it.
However, the VA does pride themselves on their low default rate. As of right now, they have the least amount of defaults out of any government-backed program.
Before you take out a VA loan for an investment property, really think about the risks. Can you handle being a landlord? This means both financially and physically. Can you handle the costs of maintaining other units? You will be in charge of all maintenance and repairs. You’ll also have to hold insurance that covers each unit.
Physically, you’ll have to be able to maintain the properties and collect the rent. You’ll need the wherewithal to have proper leases drawn up and executed. Of course, if you have the finances you can hire people to do this for you. It’s also possible to hire people to do the maintenance and repairs for you.
It all comes down to what you can afford. If you think it’s feasible, owning an investment property can be a great way to make a little side income. It can even help you pay your own mortgage payment on your unit.