Va Home Loan Overview And Advantages
The VA home loan has its roots in the 1944 Servicemens Readjustment Act.; This bill, in addition to creating educational and job-training opportunities, provided veterans returning from World War II an affordable path to homeownership.
Administered by the Department of Veterans Affairs and somewhat different than its original form, todays VA home loan program is an extremely attractive option for real estate investors due to the following characteristics:
- No down payment required
- No private mortgage insurance required
- Low interest rates
;*The VA does not actually originate and service loans. Banks and other mortgage lenders do, and the Department of Veterans Affairs guarantees a portion of the loans, thus minimizing risk for the lenders.;
Typically, the largest obstacle faced by new investors is coming up with enough cash for a down payment on a rental property.; As such, veterans look at the above advantages and quite understandably ask how they can use the VA loan to begin investing in real estate.
Buying A Va Loan Foreclosure 4 Things You Need To Know
Using your VA loan benefit to purchase a foreclosed home provides some homebuyers the chance at getting a new home under market value. But distressed properties often come with their own challenges, with some of the biggest rooted in the homes condition and upkeep.
Buying a foreclosure can look different from your run-of-the-mill home purchase. Foreclosures typically go through an auction with the county sheriff. In the event it fails to sell, it may go to a third-party auction.
Here are four key things that prospective buyers need to know about using their VA home loan benefit to buy a foreclosure.
Requires No Money To Get Started
The number one excuse for not getting started in real estate is I dont have enough money.
This is actually one of the reasons I love real estate!
This excuse raises the barrier to entry for real estate investing and keeps a lot of the would-be competition away.
That being said, the VA loan eradicates this excuse soundly!
The VA loan allows for 100% financing. That means you dont need to pay a single penny to buy a home!
While this is great for buying a primary residence, it is also great for investors.
Imagine earning a return on your investment of $0.00 Any return is an INFINITE return because you didnt have to invest any capital!
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The Two Ways You Can Use A Va Loan For Investment Property
There are many ways to purchase an investment property. You could use loans designed specifically for investors, or you could, if you have the funds, purchase the property outright.
But there is one strategy that often gets overlooked: VA loans.
While not meant for investments, VA loans can be used for this type of purchase, and you may find that these loans are perfect for your overall investment strategy.
How To Use A Va Loan For An Investment Property
by Emma Dudley | Last updated Apr 16, 2021 | Real Estate Investing, Spark Blog |
Real estate investing requires money, and usually more than we like when buying an investment property.;
Fortunately, you can leverage other peoples money to buy our own assets. But navigating the world ofinvestment property loans is stressful and oftentimes confusing. Between higher down payments, higher interest rates, and higher lender fees, many real estate investors wonder: How can I use owner-occupied mortgage loans to finance investment properties?
And no mortgage program comes with better terms than VA loans.
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Unacceptable Va Loan Uses
Unacceptable uses include:
- Purchasing a home as an investment property. Veterans cant use VA financing to purchase a home solely as an investment property. VA loans are designed to fund primary residences for service members.
- Using as a business loan. VA loans cant be used to purchase a storefront, office space or any other non-residential properties.
- Buying unimproved land. Veterans cant use VA loans to purchase bare land or farm ground that does not contain the borrowers primary home. You also cant buy land with the intent of someday putting a house on it.
- Buying abroad. VA loans can only be used for properties in the United States and its territories, which include American Samoa, Guam, the Northern Mariana Islands, Puerto Rico and the U.S. Virgin Islands.
Its important to know that lenders are free to add their own property restrictions to this list. For example, many VA lenders wont offer financing for manufactured homes . Others will decline to lend on properties like a working farm or a geodesic dome. Acceptance or denial from one lender does not necessarily translate into acceptance or denial from all lenders.
Can I Use Investment Income To Qualify
Similar to conventional loans and other federal loan programs, the VA housing loan requires the home to be affordable for the borrower. According to the VA, affordability is determined by a combination of qualifying debt and monthly income. Both are used to calculate debt to income ratio, with the standard gauge being 41 percent. The VA mandates that applicants have an adequate income to enhance the likelihood that the mortgage is repaid in full. Lenders look at the applicants gross monthly income prior to deductions and taxes, then determine the probability of the incomes continuance. In assessing the chances of the incomes continuation, the lender is looking for an expectation that the income will carry through for the first three years of the mortgage loan.
In terms of qualifying guidelines, many sources of income are deemed allowable. Lenders assess the totality of an applicants financial situation; they do not just look at one area of a borrowers revenue stream when determining eligibility.
The question Can I use investment income to qualify for a loan? often comes up. The answer is
Yes.;However, the investment income must be reported on your last two years of tax returns. Additionally, you must have a reasonable expectation to receive the investment income for a period after you close your escrow.
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Can I Buy A Rental Property With A Va Loan
Most lenders would immediately answer No to the question of whether you can buy a rental property with a VA loan. They would be both correct and incorrect.
VA defines an investment property as one that the veteran does not occupy and a primary residence as the property you intend to occupy. Thats pretty straight forward…or is it?
Lets look a little closer:
VA states that in order to buy a home using a VA loan, you must certify that you personally are going to occupy the home and that you intend for the home to be used as your primary residence now and in the future. This does not mean that you can purchase a home, say youre going to live in it for a month and then turn it into a rental property. That, in most cases could be deemed as mortgage fraud.
So how is it you can purchase a home with a VA loan and use it as an investment property? Seems impossible doesn’t it?
What many people forget is VA allows you to purchase a property with more than one unit . Because this rarely comes up, lets just say you can use a VA loan to purchase a home up to 4 units. You just need to occupy 25% of the property or generally speaking, one of the units.
Are you seeing the loophole?
So you have a property with up to 4 units. Youre occupying one of the units. What are you going to do with the additional units? Assuming there aren’t dozens of cats involved and youre not crazy, more than likely youre going to rent the other units out.
And theres your rental property.
How To Compare Lenders
Things to consider when you compare lenders are the annual percentage rate , terms, closing costs, and speed of funding. With investment properties, sometimes the speed of funding can be the most important factor.
Your particular goals will play an important role when you compare lenders. For example, if a quick flip is your goal, a higher interest rate might not matter as much for a loan that funds in 48 hours. On the other hand, if youre investing in a rental property, the total cost of borrowing money is crucial because it will eat into your long-term profits. To research investment property mortgage lenders, find the best mortgage companies here.
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Buying With Bad Credit
You dont need top credit scores to get a mortgage loan for an investment property. A better score will get you more favorable rates, but you can get approved for a mortgage with a credit score of 630 or better.
If your score doesnt reach those levels, you should look into hard money lenders and real estate syndicates for investment money. Just know that these loans will come with higher interest rates.
Va Appraisals And Investment Properties
In case you havent 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 its 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.; Im trying to keep his identity a secret, but hes a surfer, and his first name is Doug.
To be fair, many peoples VA loans go through without a problem, but the appraisal process is more stringent than what a traditional loan requires.
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Best For Rehab Loans: Lendingone
Why We Chose It: LendingOne earns our nod for best rehab lender because they are one of the very few commercial lenders that make it easy to get a pre-approval letter, they finance up to 90% loan-to-cost and provide lower rates and fees than their competition.
Pre-approval/proof of funds available online in under five minutes
Founded by investors to improve upon traditional lenders limitations
$150 charge for each draw
Only available for one- to four-unit properties, no commercial
In 2014, Bill Green and Matthew Neisser founded LendingOne in response to their frustrations felt toward the difficult lending environment from rigid bank criteria and the easier, though more expensive, hard money alternatives.
As a direct private real estate lender, LendingOne has become the best rehab lender in the industry because they help investors get what had been missing in the market, such as pre-approval letters and proof of funds, higher leverage, and lower rates and fees.
LendingOne offers fix-and-flip and rehab-to-rent loan products. Down payments range from 10% to 20%. Their 30-year loan for rehab-to-rent projects starts at 4.99% for the interest rate, with APRs slightly over 5% currently. Their fix-and-flip loans start at 7.49% with APRs starting in the mid-8% range. Rates are based on credit score and loan to value . LendingOne loans on two- to four-unit properties only, including condos and townhouses.
Can I Buy A Multi
Yes but with some stipulations.
The U.S. Department of Veterans Affairs intends the VA home loan program to give qualifying homebuyers the chance to afford a home to live in. With your loan, you can purchase a property that has up to four units. To meet the VA occupancy requirements, youre going to have to make one of the units your permanent residence. This is fairly standard with other mortgage types, such as FHA loans.
You dont have to live in the building the entire time you own it, though. Once you pay off your VA loan, youll now own a fourplex that can generate rental income.
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Can You Use Va Financing On An Investment Property
March 19, 2018 By JMcHood
If you are a veteran, you may be eligible for a VA loan. This means 100% financing and flexible guidelines. However, theres 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.
Purchasing A Multiunit Property
The other option for using a VA loan for investment property is to buy a multiunit house. With VA loans, and many other government-backed loans, you can buy a property that has up to four units, giving you the chance to not only purchase a property for yourself, but to purchase a property that will bring an income.
If you use this strategy, you are not free from the occupancy requirements; you still have to live on the property for a certain period. But you only need to occupy one unit.
Suppose you were to purchase a duplex. On one side, you can live on the property and make it your home; on the other side you could have a renter who is paying you a monthly income. After a certain period, you can move out and turn the entire property into an income-generating investment.
There are rules for these properties that come from both the VA and the individual lender. First is the occupancy rules which we have discussed. You will also be limited to properties that have four units or less; if it has five units, the purchase is off limits and youll likely need a commercial loan. The VA also has specific details for the nature of the property. For example, all units must be accessible without passing through other units, and the property must be primarily zoned for residential occupation. The utilities need to be separate, but certain facilities like laundry can be shared.
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Option #: Conventional Bank Loans
If you already own a home that’s your primary residence, you’re probably familiar with conventional financing. A conventional mortgage conforms to guidelines set by Fannie Mae or Freddie Mac, and unlike an FHA, VA, or USDA loan, it’s not backed by the federal government.
With conventional financing, the typical expectation for a down payment is 20% of the home’s purchase price, but with an investment property, the lender may require 30% of funds as a down payment.
With a conventional loan, your personal credit score and credit history determine your ability to get approved, and what kind of interest rate applies to the mortgage. Lenders also review borrowers’ income and assets. And obviously, borrowers must be able to show that they can afford their existing mortgage and the monthly loan payments on an investment property.
Future rental income isn’t factored into the debt-to-income calculations, and most lenders expect borrowers to have at least six months of cash set aside to cover both mortgage obligations.
Ready To Be A Landlord
One of the biggest questions a veteran may have about buying rental property is if theyre prepared to be an onsite landlord.
Veterans can best prepare for becoming a landlord by thinking of their rental property as a business, Davis says.
Theyll need to screen all rental applicants equally, running credit reports and background checks on each, and choosing the best candidate, he says. Theyll need to serve late notices if the renter fails to pay on time, and file in court for eviction. Theyll need to be responsive to make repairs when something breaks.
Its a business, and anyone whos not prepared to treat it as such should not become a landlord.
Living in the same building as your renters requires a certain compartmentalization of your relationships with your renters, Davis says. It requires having a professional and personal relationship at the same time, and can include doing favors for each other and being respectful of noise while requiring payment on time.
Landlords should set aside cash for repairs, vacancies, rent defaults and other costs, Davis suggests. Ideally they should have one to three months of rents set aside for each unit, he says.
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Requirements For Investment Property Mortgages
Investment property loan lenders tend to consider rental units a higher risk than owner-occupied dwellings. This is because the landlord profession itself can be risky. If a tenant stops paying the rent, a landlord may stop paying the mortgage. So, investment property buyers need a good or excellent credit score, as well as a larger down payment than for a conventional mortgage. You also need to have a good debt-to-income ratio and proof of a steady income. Investment property loans may also have a slightly higher interest rate compared to mortgages on primary residences.
F&M is proud to be one of the local banks that offer investment property loans. We know that a robust rental market contributes to a thriving community. Thats why we we work with investment property buyers to create an investment loan that works for your budget and needs. Our local ownership gives us more flexibility with loan terms and decision-making than bigger banks.