Occupancy Requirements & Buying A Second Home
At the closing table, you sign documentation stating your intention to occupy the home as your primary residence. Your mortgage lender typically expects you to live in the home as your primary home for at least 12 months before converting it to a rental property, and theyll have issued you a mortgage accordingly.
But what if you have legitimate reasons for needing to convert your recently acquired primary residence to an investment property? There are ways to convert your primary residence into a rental property.
Rental Property Investor From San Diego Ca
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You can rent this house once you’ve lived in it a year, or have orders to leave. And then buy your next house with an FHA loan, which has a low down payment requirement. That way you have one rental and one investment property, but both properties have the low owner occupied interest rate.
Investment mortgages have higher interest rates, in most cases. There are also added closing and transaction costs when buying and selling that cannot be discounted.
Conversely, you can also look to refinance this property and use the VA entitlement again. Several times, we have purchased a primary owner occupied house, improved the house with paint and landscaping, carpet and occasionally an updated kitchen or flooring. And we moved out of it after at least a year, turning the last into a rental. You could keep doing this, becoming a serial mover, and keep lower down-payments and owner occupied rates, for much of a military career.
Contrarily, investment properties require larger down payments and have higher interest rates.
We set a goal to “go wide” by buying a number of properties while on active duty, and then we intend to “go deep,” by paying them off. Even 5 houses, paid for, will nicely accompany a military retirement.
All the best~
Investor From Aurora Colorado
Yes as everyone has stated you can use VA Loan benefits to purchase an additional home as long as that new home is going to be your primary residence. The only additional information I can add is that the new VA Loan will use what remaining amount you have on you VA Loan benefit. If the new primary residence is more than your remaining VA Loan entitlement you will have to bring the additional funds to closing. Your loan provider can tell you exactly how much house you can buy without bringing money to closing and they can also estimate how much money you will need to purchase a house over your VA Loan entitlement amount.
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Va Loans And Renting: What Are The Requirements
As a veteran, youre entitled to use a VA home loan tobuy a house as long as youve fulfilled the basic requirements. While most people tend to live in the homes they buy for years, sometimes, you may not be able to. When this happens, youll likely feel tempted to start renting the property out to another tenant. So, can you? Heres what you need to understand about VA loan requirements and how they influence your ability to rent out your home.
Can Military Members Buy And Rent Out A Home With A Va Loan
The short answer is no, but under certain circumstances, this can change. We will explore these circumstances and how you can legally rent out your home purchased with a VA mortgage loan.
For your information: The VA home loan benefit is offered to veterans and currently serving military members who meet time-in-service requirements Those requirements vary depending on when you joined the military and under what conditions you may have served.
The VA Home Loan offers $0 Down with no PMI. Find out if youre eligible for this powerful home buying benefit. Prequalify today!
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Can You Afford To Buy And Own A Home
The next question to ask in your rent vs buy decision is “Can you afford a home?” To buy a home you usually need to make a down payment. You will probably need to pay closing costs. Once you own the home, you will need to make monthly principal and interest payments and may need to pay mortgage insurance. You’ll have to pay property taxes and homeowner’s insurance in addition to any maintenance or repairs. Depending on where you buy, you may need to pay condo or homeowners association fees and flood insurance too.
The costs of buying a home come with many upsides too of course! You can get a sense of ownership and pride. You can make the renovations and improvements you want when you own your home. Homeownership gives you roots in a community and gives you a place to have a family and create memories.
If you want help calculating how much you can afford in a monthly mortgage payment, check out our Mortgage Affordability Calculator.
How To Rent Out Your Home When You Still Owe A Mortgage
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You love your home and can comply with the mortgage and tax requirements but need extra money for a family emergency. Or, you’ve been transferred to another location and the real estate market isn’t advantageous to selling. Or, you’re having a tough time covering all your expenses and want to explore renting out your home and using that income to pay your mortgage costs. All are situations that can be relieved if you put your home on the rental market. But will your mortgage lender allow you to do so?
Tip
If you have an FHA or VA loan you must live in the house for at least one year before renting it out. They check every once in a while to determine if the owner still resides in the property.
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Can You Use A Va Loan For A Rental Property
The Department of Veterans Affairs allows VA homebuyers to purchase multi-unit properties with the intention of using one of the units as their primary residence.
So, yes, it is possible to use your VA loan for rental property, bearing one of the units is your primary residence.
However, a VA mortgage cannot be used to buy property or land solely as an investment or rental property.
However There Are Rare Circumstances Where A Property Purchased With A Va Loan Can Be Rented Out Here Are Three Scenarios Where You Could Rent Out Your Property:
- Youve already repaid the mortgage in full. With VA Loans, you are not penalized for paying the loan off early. If your late grandmother leaves you a substantial amount of money in her will and you want to pay off your six-month-old mortgage, you can. Once youve paid off the mortgage, you dont have a VA Loan anymore, and are no longer bound by VA Loan rules. Live in the house, rent it out, or sell it to someone who wants to tear it down and build a McMansion. The choice is yours!
- The loan was used to buy a multi-unit property. You canbuy a duplex, threeplex, or even a fourplex with your benefits. If youre living in a unit, you can rent out the others without having problems with the VA. Just keep in mind that, as the property owner, youre responsible for the mortgage. What happens when you cant find renters or they dont pay on time?
- You refinance your VA Loan into an Interest Rate Reduction Refinancing Loan, or IRRRL. Homeowners often take this option when they need to relocate temporarily. This could be due to a job transfer, deployment or for other reasons. In addition to other benefits, IRRRLs dont have the same residency requirements as VA Loans. You need only affirm that the property was used as your primary residence. When a VA Loan becomes an IRRRL, the home can be rented out.
In the majority of cases, these are the only circumstances when you can rent out a home you purchased with a VA Loan.
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How To Screen A Roommate
If youre renting out a room, its extremely important you get a good renter in your home. Not only do you want to ensure that they will pay rent, but you also need to remember that normal tenant issues are amplified when youre sharing a home with the renter. You will be sharing common areas, so screening is even more important.
Our tenant screening guide will walk you through how to find a great renter.
To do this properly AND legally, you need to start with a compliant rental application that gives you permission to run a background check and contact references.
Once you have the proposed tenant fill out the application you should run a full background check.
We can do this for you right here at RentPrep.
Federal Home Loan Occupancy Rules
You have gotten approved for your loan, the closing process is about to be closed, and it will soon be time to move in. Sometimes, you cant enjoy your new home right away. There could be a family illness, finishing up a job in your previous home town, or you could be a veteran getting deployed. What are the rules of occupancy with federal home loans?
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You Dont Have To Refinance
VA loans have occupancy requirements, and youll sign mortgage documents that indicate you plan to live in the home as your primary residence, at least for a specific time frame. But when youre in the clear, you can look to rent out your current home without having to refinance out of your current VA loan.
Thats important because some refinance loans will come with their own occupancy requirements, not to mention the costs associated with closing on that new loan.
But some limitations arise when youre keeping your old VA loan and trying to buy again with a new one. The big one revolves around whats known as VA loan entitlement.
» MORE: See if you qualify for a $0 down VA loan
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You Might Struggle To Count Rental Income
Having one mortgage payment already can make it tough to qualify for a new loan. One of the big attractions of turning your primary residence into a rental is, of course, generating rental income.
But you might not be able to count the future rental income youre expecting, even if you have a renter lined up when youre ready to close on your next purchase. You might need at least a two-year history of receiving rental income to count it as effective income toward mortgage qualification. Thats obviously all but impossible when youre first looking to convert a primary residence into an investment property.
The good news is that projected rental income could still prove helpful. Some lenders might be willing to treat it as an offset, meaning the rental income could essentially cancel out the mortgage payment as a monthly debt.
Refinancing A Rental Property With A Va Irrrl
To be able to use a VA loan to purchase a new home while continuing to own their current home, veterans should do two things:
Refinancing with an IRRRL is pretty simple. To be able to use this refinance program, veterans need to be able to get a lower interest rate than they have with their existing VA loan. This saves the homeowner money on monthly payments, too, so its not a bad idea for some homeowners even if theyre planning on staying in their home.
Getting an IRRRL isnt nearly as complicated as getting a VA loan. And compared to other refinance options, its a very smooth process. You wont need to prove your income, you wont need another VA appraisal and, most importantly, you dont need to prove that you are or will be living in the home in the future. You only need to supply your information on when you first occupied the home.
So, by getting an IRRRL, you can continue to keep the home while helping your own cause for your next VA loan. This helps you get around the primary occupancy rule.
Next, you need to make sure you have enough entitlement left to cover the new loan amount. Your certificate of eligibility will tell you the amount of your entitlement.
So, if you purchased a home below that value and even made a downpayment you likely have entitlement left. Thats good since youll need to have entitlement left to get a new loan from your VA lender.
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Things You Need To Know About Va Refinance Loan Regulations
VA loan rules are similar to other government-backed mortgage regulations including occupancy requirements like VA mortgages, and similar Streamline Refinance options for FHA-to-FHA refinance loans
Some VA occupancy policies may be subject to interpretation. A Veterans Affairs representative indicated by phone that there are some instances that require more information digging. Lenders may need to know the reasons behind refinancing prior to renting out a property. It is not an official decision made by the Department of Veterans Affairs, but it may explain any confusion or delays that may occur.
On paper, VA loan rules seem to be very succinct on the issue of buying and renting as an absent landlord. The legal way to use the home purchased with a VA loan as a rental property you do not live in requires the following steps:
- Buy a home with a VA mortgage
- Move into the property and occupy it as your home
- Refinance the loan with a VA Streamline Refinance
- Move out of the home and rent it out to a third party
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.
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Can I Rent Out My Home If I Have A Mortgage
The questions vary Can I rent out my house on a normal mortgage? Do you have to change your mortgage to rent out your home? And the answer can be confusing because no blanket rule applies to all situations and all lenders.
When you get a loan, the lender wants to know how you intend to use the property. If you will occupy it personally, you present less risk than someone who intends to use it as an investment property and rent it out. For this reason, owner-occupied mortgages often come with lower down payments, they are easier to qualify for and they offer lower interest rates.
When you get your mortgage, you must be honest about your intentions for the property or you could be accused of occupancy fraud. But what if you initially plan to occupy the home and your plans change?
If you have an owner-occupant mortgage and decide you want to rent out your home, it may be an option. Youll need to contact your mortgage lender to discuss the situation. Some mortgage lenders will permit you to rent out your home with your existing rate and terms. However, some may charge a fee, make you wait a certain amount of time, or require you to refinance.
Similarly, certain loan programs can have restrictions. For example, if you have a USDA or FHA loan, owner occupancy is required for one year unless you have an extenuating circumstance like needing to relocate for a job.
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Should I List All Adults In The Lease Agreement
It is prudent to get every adult inhabitant of the rental agreement or lease. Failure to do so can lead to some hairy issues down the line. For example, you need to serve the leaseholders when a potential legal issue arises. If there are three inhabitants of an apartment, but only one is on the lease and you can never find them at home, it will be difficult for you to begin an eviction process.
It still can be done, but it is more difficult and time-consuming. If you had gotten all the people living in the apartment on the lease, however, you could serve any one of them.
Exceptions To The Va Loan Occupancy Requirements
There are a few scenarios and living situations in which a VA buyer can purchase a home and occupy it after the 60-day mark. Still, the VA typically requires service members set an occupancy date for less than 12 months after closing a loan. In addition, service members need to make clear the specific date occupancy will occur and the specific event that will make occupancy possible.
Here are a few common situations in which an extension might be permissible:
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Rental Property As Income
Becoming a landlord can essentially make qualifying for a VA loan easier. A borrower can use rents from the other units in a multi-unit property to help them qualify for a loan by counting the rent toward income, says Brian Davis, a real estate investor who teaches about rental investing at SnapLandlord.com.
Typically they can add 75 percent of the market rents toward their qualifying income, he says.
The home appraisal can include the market rents in the area, and a borrower doesnt have to always show that they have tenants ready to move in, Stobbe says.
Its best to show you have a tenant signed up, but its not always necessary, she says.
