va loan investing no money down

The Complete Guide to Investing with VA Loans

Welcome to the Rich on Money Complete Guide to VA Loan Investing!

There are many things you can do with the VA loan benefit.

But can you invest with it?

Kind of, sort of.

The VA doesn’t say you can, but if you understand the rules, and buy properties as you move from assignment to assignment in the military, it is possible.

You can’t just buy a home and make it a rental property without living in it first.  There is an occupancy rule I’ll be discussing.

You can, however, buy a house at your current assignment using your VA benefit, live in it for a short period of time, turn it into a rental property when you leave, and buy a house at your next assignment with a VA loan repeating the entire process.

Another possibility for investing is buying a 2, 3, or 4-plex using your VA benefit and living in one of the units  for a short period of time.  When you move on to your next assignment, you’ll be able to turn the entire property into an investment legally.

Let’s start digging into the details!

The first thing we need to understand is the occupancy rule.

Occupancy Rule

To get a VA loan, you must intend to occupy the property as a personal residence.  Most VA lenders (the VA itself doesn’t do the lending) want you to move into the property within 60 days after closing, but exceptions to this rule can be worked out with lenders on a case-by-case basis.

In some instances, a spouse can move into the property for you, but the lender will still want to make sure you can afford to maintain both residences before letting you qualify.  In some cases, it may be possible for a dependent child to move in, but this is rare.

Multi-family

The VA loan allows you to purchase single family, duplexes, tri-plexes, and four-plexes.  You still have to intend on living in one of the units, but are allowed to rent the others out.

Qualifying for the Multi-family VA loan

Each lender will approach the qualifications differently, but here is an example from Veterans United, a large lender.  They won’t consider potential future rental income as income towards qualifying for a mortgage unless you have at least a two-year track record as a landlord or having used a property management company. You need the renters in a lease before closing as well.

If you qualify and want to count future rental income, they also want six months of full mortgage payments as cash reserves in the bank.  Other lenders will probably require something similar.

Single Family Investing

While the VA loan program was not meant to be used for investment properties, it can be used for that purpose as long as you have an understanding of all the rules.

To invest in single family homes with the VA loan program, you must intend to live in the house as your primary residence when you purchase it, and live in it for at least a year before turning it into a rental.  That one-year timeline is not set in stone and not mandated by the VA.  It can be flexible depending on the circumstances that cause you to move.   Check with your lender.

The point to remember here is, you are buying a house to live in for a few years, but should be more concerned about how it will perform as a long-term buy-and-hold rental when you purchase it.  You know when you move away in a few years it will become an investment property.

Multi-family Investing

It’s easy to invest right off the bat when you buy a 2, 3, or 4-unit property with a VA loan because you can rent out the additional units immediately.  In fact, the lender will likely require they are rented out before closing.  The same rule as single family homes still apply, you need to intend to live in one of the units and stay at least a year, or whatever the requirement for your lender is.

Once you move on to your next assignment, you are legally able to rent out the entire multi-family property as an investment.  This is an extremely useful benefit because you are able to buy a multi-family property with no or a small down payment.

Try that without the help of the VA!

Most people can’t afford the down payment on a 4-unit property.

I should point out one of the benefits of purchasing a multi-unit with a mortgage.  It’s called househacking.

Househacking is when you either rent out rooms in your house or units in your building to help cover your rent or mortgage.

In this case, if you have a four-plex, and rented out three of the units, it is possible to cover most or all of the mortgage payment with just the rent from those three.

That means you would be living in your unit for free, or almost free!

There are other expenses to consider on top of the mortgage, but this can be huge!

Intermittent Occupancy

This is a somewhat rare exception to the VA occupancy rule.  This rule allows buyers to move forward with a VA loan even if they can’t maintain a physical presence at the home on a daily basis.  This often applies to Veterans working overseas as civilian contractors, but every buyer’s situation is different and you can always attempt to discuss this with your lender.

The lender will want to establish that the veteran has a history of continuous residence in the community he wants to buy in.  They’ll also be checking to see if it looks like a primary residence has already been established somewhere else.

Fees

Everybody loves to point out there is no private mortgage insurance (PMI) on a VA loan when you have less than 20% down.  This is because the VA guarantees 25% of the loan up to a limit for a lender.  This makes it possible to purchase houses with no money down without paying PMI.  This guarantee also allows interest rates to be slightly lower than similar non-VA loans.

This is an investors dream!

But nothing is free in this world.

The VA balances this out by charging a funding fee for the loan.

This fee will be a percentage of the entire loan, and can be paid in cash or rolled into the loan price.

The amount of the fee will depend on the type of Veteran you are, down payment amount, and whether it is your first or a subsequent time using the VA loan.

Type of Veteran Down payment % for first time use Subsequent use
Regular Military None

5% or more

10% or more

2.15%

1.50%

1.25%

3.3%

1.5%

1.25%

Reserves/National Guard None

5% or more

10% or more

2.4%

1.75%

1.5%

3.3%

1.75%

1.5%

 

Ability to Waive Funding Fee

Certain people are able to waive the funding fee.  This is a HUGE benefit.  If you fall in this category, the VA loan is a no-brainer for you.  It will be an excellent value compared to other options.

You do not have to pay the fee if you are a:

  • Veteran receiving VA compensation for a service-connected disability, OR
  • Veteran who would be entitled to receive compensation for a service-connected disability if you did not receive retirement or active duty pay, OR
  • Surviving spouse of a Veteran who died in service or from a service-connected disability

If the lender is able to verify from the VA, usually through the certificate of eligibility (COE), that you are exempt, you will not have to pay this fee at closing.  If there is any doubt or your disability claim is still pending, you will need to pay.  You can file for a refund when your claim is approved and you have all the appropriate documentation.

How to Get a VA Funding Fee Refund

Your Certificate of Eligibility (COE) will state whether or not you’re exempt from paying the fee.  There will be cases, however, where there is a pending disability claim when the loan closes.

If your pending claim is later approved with a retroactive date before the close of the loan, you will be eligible for the VA funding fee refund.  You may also be eligible for the refund if you have no claim pending at closing, but later have a disability claim approved that is retroactive to a date before loan closing.

This could spans years.  It is even possible to request a refund after a loan has been entirely repaid.

Since this fee is paid to the VA, they determine refund eligibility.  You can start the process one of two ways:

  1. Through your original lender
  2. Through your VA Regional Loan Center

You are usually reimbursed depending on how you paid the fee.  If you paid in cash, you will be reimbursed in cash.  If you rolled it into the loan, your loan amount will be reduced by that amount.

I have two great links given to me courtesy of Doug Nordman at the-military-guide.com.

The first one is the VA handbook itself.  Tons of info if you really want to get into the weeds:

https://www.benefits.va.gov/warms/topic-homeloans.asp

The second link is the specific chapter inside the handbook that explain to VA employees how to process VA funding fee refund requests:

https://www.benefits.va.gov/WARMS/docs/admin26/m26_01/M261_Chapter%203%20-%20Fees%20and%20Charges%20Paid%20by%20the%20Borrower%20FINAL.docx

Feel free to comment at the bottom of this post if you have questions about this.

Other Fees

  • The lender, not the VA, sets the interest rate, points, and closing costs. You can shop around for better rates.  Some may have lower fees or negotiate certain credits
  • The cheapest lender may not always be the best. The ability to close quickly and efficiently is important, and can be worth extra money for a more competent company.  Try to get references and referrals
  • The seller can pay for some closing costs up to 4%
  • No commissions, brokerage fees, or “buyer broker” fees may be charged to the Veteran buyer

Eligibility

You need satisfactory credit, sufficient income, and a valid certificate of eligibility from the VA to get the loan.

The VA does not require a borrower to have a specific minimum credit score for VA loans, but many lenders will require applicants to have a credit score of at least 620. If a borrower does not meet this requirement, they may still be approved, but higher interest rates may be charged.

When applying for a VA loan, be prepared to provide copies of W2 statements and previous pay stubs to verify income as well as documentation of assets such as checking accounts, savings accounts, and other financial investments.

VA home loans can be used to:

  • Buy a home, a condominium unit in a VA-approved project
  • Build a home
  • Simultaneously purchase and improve a home
  • Improve a home by installing energy-related features or making energy efficient improvements
  • Buy a manufactured home and/or lot
  • Refinance an existing VA-guaranteed or direct loan for the purpose of a lower interest rate
  • Refinance an existing mortgage loan or other indebtedness secured by a lien of record on a residence owned and occupied by the veteran as a home

There are a bunch of different ways to be eligible for this loan:

  • 90 days in a combat zone
  • 1 year of active duty
  • 6 years of drilling as a reservist or national guard

Here is the link for eligibility rules:

https://www.benefits.va.gov/homeloans/purchaseco_eligibility.asp

Loan Limits

The VA does not have a cap on how much you can borrow, but they do limit how much of the loan they will guarantee.  At this amount or below, you are able to have no or a low down payment.  Once you go beyond this loan limit, the remaining portion will require a larger down payment, usually about 20% of the portion over the loan limit.

The typical loan limits for no money down are as follows:

$453,100 for one property

$580,150 for a two-plex

$701,250 for a 3-plex

$871,450 for a 4-plex

These are the amounts for most locations in the U.S., but you should look up your location on the VA website.  Some locations have limits quite a bit higher, such as Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

You can check these limits here:

https://www.fhfa.gov/DataTools/Downloads/Pages/Conforming-Loan-Limits.aspx

Remaining Entitlement

You can have more than one VA loan at a time up to the loan limit above.  The loan limit applies to the location you are now, not the location you bought before.

An example would be: you bought a property in Columbus, Ohio for $200,000 and now you live in Montgomery, Alabama.  The loan limit for Montgomery is $453,100, so you still have $253,100 of remaining benefit you can use.

Remember!  On your second or subsequent properties, the funding fee is quite a bit higher.  It can be reduced drastically by putting 5% down.  This might be a good idea!

You can buy a second, or even a third house with this remaining benefit.  Occupancy rules still apply.

An entitlement can also be restored by paying off the VA loan and disposing of the property (that usually means selling it).  If you pay off the loan and keep the property, you can restore the entitlement one time in your life. This will free up the VA loan entitlement to be used again, subject to occupancy rules.

A VA loan is assumable.  This means another party qualified for VA loans can assume your loan.  If somebody assumes the loan, your entitlement is restored.

The VA Appraisal

Once you have an accepted offer on the property, it will need to undergo a VA appraisal.  This is part of the loan qualifying process where they check the fair market value and, more importantly, see if the home is safe, sound, and sanitary according to VA standards.

Safe – The below chart was created by Veterans First Mortgage to give an idea of some of the things the appraisal will look at to determine the property is safe:

VA loan investing

Sound – This applies to the structure and functionality of windows, doors, and appliances.  They care about foundations, even on manufactured homes, and will pay attention to water leaks and make sure the source of the damage is addressed.

Sanitary – This leaves a lot subject to interpretation, but the home cannot be a health hazard.  Think sewer, septic, water, wells, etc.

How Will This Affect My Investment

In case you haven’t noticed, the appraisal that happens on a VA loan is different than one on a conventional loan.  The safe, sound, and sanitary guideline is approached differently by each VA-approved appraiser.  This has caused problems for some buyers and sellers.  This will affect your investment strategy.

For one, you may consider avoiding properties that need significant work.  Fixer-uppers and distressed properties can be tricky.  In most cases, identified issues have to be fixed before closing.  This is unfortunate, as the sound investment practice of buying distressed property and fixing it up yourself does not work well with VA loans.

Caveat:  There is a specific way to purchase a property with a VA loan with the express purpose of improving the property.  I hear it’s difficult and requires a significant amount of paperwork and navigation of bureaucracy.  Proceed at your own risk!

Additionally, there have been some complaints, both from buyers and sellers, that certain VA appraisers come up with unreasonable findings or low estimates.  While sometimes these are successfully challenged, on certain occasions deals are lost.  This is upsetting to both the buyer and seller.

A prominent blogger and good friend of mine had this very problem.  I’m trying to keep his identity a secret, but he’s a surfer, and his first name is Doug. (I know, too vague)

He challenged unreasonable findings by his VA appraiser, and was unsuccessful in having anything done about it.  He was forced to use a different funding source that cost him a lot more money.

To be fair, many people’s VA loans go through without a problem, but the appraisal process is more stringent than what a traditional loan requires.

Also, keep in mind, this appraisal is not for you.  It is not to protect your interest in this property.  It’s for the lender and the VA.

I recommend you do a separate home inspection at your expense to identify all issues with the property you might not be aware of.  I do this on all my properties.  This person is paid by you and is looking out for your interests.  That matters.

You should tell them what types of things concern you the most.  I’m always most concerned about hidden water damage, foundation issues, and add-on rooms that were done poorly.

Should You Invest with a VA Loan?

It’s nice to know you can invest with a VA loan.  That doesn’t necessarily mean you should.

Let’s look at some of the important factors to consider.

On a VA loan, everyone gets so excited because you can buy a property, maybe even a four-plex, with NO MONEY DOWN!

va loan investing no money down

I know a lot of real estate investors that consider this the greatest thing in the world.  They would say you are crazy if you don’t use your VA benefit to it’s max to get as much property as you can with no money down.

But just like alcohol, chocolate, and Game of Thrones, I believe all things should be done in moderation.  Consider not being too highly leveraged with no equity.

The risk you run is buying a property with no money down and then having the price of your property and rents drop during the time you own it.

When you move away, you may find that you have trouble renting it out because of a depressed market in your area, and you can’t sell because you have no equity and owe way more than the house is worth.

If you can’t rent it out to cover your mortgage, and you can’t sell, you are forced to dump money into this property every month until you figure out how to fix your problem.  The property is no longer an investment, it’s a liability.

Of course, the opposite could happen.  Your no money down property could skyrocket in value, and you come out the hero.  That would be great, but there are no guarantees.  You need to gauge your risk tolerance and decide to what level you want to take advantage of no money down.

If you are going to make a 20% down payment, it may not make sense to use your VA benefit.  Using mortgage calculators, compare the interest rates of the VA loan vs. other types of loans.  Be sure to factor in the funding fee.

You should be able to figure out which loan will be better for you.  It may end up being VA, but not necessarily.  Also, you may want to save your VA benefit for an opportunity in the future where you want to buy a house with no money down.

A common investment strategy is buying distressed homes at deep discounts and then doing the work of getting them ready to either rent out or flip.  I’ve done this.  Based on what we know with the VA appraisers, this strategy won’t work well with VA loans.

It’s Not as Simple as Just Buying Homes

You’ve decided the VA loan is for you.

Great.

So you buy a home at every assignment, and turn it into a rental when you move away.

And retire rich.

Right?

Nope.

This is a common mistake that military members and Vets make.  They buy houses that won’t make good rentals.  They don’t look at the numbers before they buy.  It is a fallacy that you should buy a house at every duty station and then rent it out when you leave.

This will not work.

You have to buy the right house in the right locations.  Not every duty station will have houses than can be bought for prices that will make them good rentals.

You need to understand real estate investing and run the numbers before you purchase.  The rental should be able to make a return on investment (ROI) that is higher than what the stock market or other passive investments would offer.

To understand more about this, read my post on Real Estate Mistakes Military Members Should Avoid

That is my complete summary of using the VA loan for investing.

Here’s a link to a summary of VA Home Loan Benefits

https://www.benefits.va.gov/BENEFITS/benefits-summary/SummaryofVAHomeLoanGuarantyBenefits.pdf

Good Luck.

I want to hear about your experiences or questions with VA loans.

Comment below.

Rich on Money

 

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5 Comments

  1. Jon

    Another great post, thank you!

  2. Fab

    I’ve used the VA loan twice so far for single family homes. The first one, in 2012, gave me a great rate of 3.25, and that’s currently being rented, and the second was average rates as of last year. My experience has been VA loans going pretty smooth if you have the right broker.

    Just to clarify, if I sell a property with the Va loan I get my remaining entitlement back but not when I pay off the mortgage (Unless I use the 1 time reinstatement)? Is that right?

    Thanks again for another thorough and great post.

    • That’s awesome that you’ve used it twice! Yes, the way you described it is correct. If you sell the house, it’s unlimited for getting your entitlement back. If you just pay off the mortgage, but keep the house in your name, you have to use the 1 time reinstatement to get the entitlement back. It’s good to know. People should use it if it applies to them.

  3. John McDermott

    Gm Rich,
    As an AF reservist, if I buy a house with the VA loan, is it the same process to move out and make it a rental in a year or 2 as active duty? Sounded like it may have included having PCS orders or something. Which I wouldn’t have. Or is it just a minimum grey area time of owner occupied? From the guidelines I’ve been reading it had to be occupied by owner, spouse, or dependant child. Enjoying your blog. Thanks.

    • It will be the same process. You don’t have to show orders or anything. If you end up needing to leave after a year or two, then it changes to a rental property. There isn’t hard and fast rules about how this should work. The important point is, when you buy, you are intending to use it as a primary residence.

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