Can I Use a VA Loan for a Second Home?

BD Nationwide has been receiving lots of questions about borrowers taking out a VA loan for a second home. Eligible active duty service members, veterans, and surviving spouses can benefit from VA loans, which offer advantages such as a zero down home loan with competitive interest rates, and more flexible lending criteria.

Can a VA Loan be Used for a Second Home?

BD Nationwide published this article to help you understand the VA requirements, possibilities, and limitations of using a VA loan for a second home and investment property.

VA loans have enabled many individuals who might not typically qualify for traditional home financing to realize their dream of homeownership. However, despite the lower down payment and credit score requirements, VA home loans still come with strict lending standards.

The VA home loan program, offered by the Department of Veterans Affairs, is one of the most valuable VA benefits available to military service members, veterans, and eligible surviving spouses. It provides an opportunity to buy a home with favorable terms, including no down payment, no private mortgage insurance (PMI), and competitive VA mortgage rates. However, a common question among VA loan beneficiaries is whether they can use a VA-loan to purchase a second property.

Can You Use a VA Loan for a Second Home or Investment Property?

The short answer is yes, but with specific conditions.

While VA home loans do have occupancy rules that prevent buyers from purchasing a property with the intent to use it primarily for generating income, it is possible to buy a home with a VA loan, live in it for a period, and then rent it out after relocating.

The VA mortgage was not created to help veterans buy an investment property. Of course, that happens but there is some navigation involved to buy an second home with VA loans.

If you wish to purchase another home using a VA mortgage, you’ll need to rely on what is called second-tier entitlement (or bonus entitlement) unless you’ve paid off your previous VA mortgage loan or used a one-time restoration of entitlement.

Most VA lenders require that 25% of the loan is guaranteed to offer a $0 down payment option. If you do not have your full entitlement, the amount you can borrow with no down payment will be limited by loan caps.

For example, if you had $50,000 of remaining entitlement after your first VA loan, a VA approved lender would approve a maximum loan amount of $200,000 (which is four times $50,000) without requiring a down payment. However, if you wanted to buy a $300,000 home, most VA lenders would ask for a $25,000 out-of-pocket payment to meet the $75,000 needed to ensure that 25% of the loan is covered.

If you plan to keep your current home and purchase a new one, you will need to update your Certificate of Eligibility (COE). Once that’s done, your lender can guide you through the remaining steps of the process.

The VA home loan program is designed to help eligible veterans and service members purchase their primary residence, not an investment property or vacation home. However, there are scenarios where you can use a VA loan for a second home:

1. Second VA Loan (Subsequent Use): If you’ve used a VA home loan before and have paid off the loan or sold the property, you may be eligible to use your VA loan benefits again. This is known as “subsequent use.” You can use the remaining entitlement from your first VA loan to purchase another home, provided you meet the lender’s requirements and the new home will be your primary residence.
2. VA Loan for a New Primary Residence: If you’re relocating to a new area due to a change in duty station, job transfer, or other qualifying reason, you can use a VA loan to purchase a new primary residence. In some cases, you may be able to keep your original home and use a VA-loan to buy another, as long as you occupy the new property as your primary residences. Keep in mind that borrowers must closing costs and the VA funding fee.
3. Using Remaining VA Entitlement: Each VA home loan borrower has a specific amount of entitlement, which is the portion of the loan the VA guarantees. If you haven’t used your full entitlement on the first property, you can use the remaining entitlement to purchase another home. The remaining VA entitlement can be used to finance a second home, provided it will be your primary home.
4. Restoring Entitlement: If you’ve paid off your first VA mortgage and sold the property, you can apply to have your full entitlement restored, allowing you to use a VA loan for a new primary residence. However, if you still own the first property and the loan is not paid off, you may only have partial VA entitlement available, which could limit the amount you can borrow for a second home.
5. Occupancy Requirements: When using a VA loan for a second home, you must meet the occupancy requirement. This means you must intend to live in the new property as your owner-occupied home. Typically, the VA expects you to occupy the home within 60 days of closing. Exceptions to this rule are possible, such as when the borrower is on active duty or has special circumstances that delay occupancy.

Situations Where a VA Loan Cannot Be Used for a Second Home

While it is possible to use a VA loan for a second home under specific conditions, there are scenarios where it is not allowed:

1. Investment Properties: The VA financing program strictly prohibits using a VA-loan for purchasing investment properties or rental homes. If your intention is to buy a property for rental income or investment purposes, you’ll need to explore other financing options.
2. Vacation Homes: Similarly, you cannot use VA loans to purchase a vacation home or a property you intend to use only occasionally. The VA loan is reserved for properties where the borrower intends to live as their primary residence. If the property is owner-occupied you get use it as an assumable VA loan when you go to sell the property.
3. Secondary Homes with No Intent to Occupy: If you want to purchase a second property without intending to make it your primary residence, you cannot use a VA loan. The primary purpose of the VA loan is to help veterans and service members secure a home they will live in full-time.

Considerations and Challenges with VA Loans

While using a VA loan for a second home is possible under certain conditions, there are several challenges and considerations to keep in mind:

1. Funding Fee: VA loans require a funding fee, which is a one-time payment that helps offset the cost of the loan to taxpayers. The funding fee varies based on factors such as your military status, the size of your down payment, and whether it’s your first VA loan or a subsequent use. The funding fee is typically higher for subsequent use.
2. Limited Entitlement: If you’re using your remaining entitlement for a second VA loan, your borrowing power may be limited. This could affect the size of the loan you can secure, potentially requiring a down payment if the loan exceeds your remaining entitlement.
3. Occupancy Requirements: Meeting the VA’s occupancy requirement is crucial. If your situation changes and you no longer plan to occupy the second property as your primary residence, you could face challenges in maintaining your VA loan eligibility for that property.
4. Selling or Refinancing the First Property: If you still own your first property and haven’t sold or refinanced it to pay off the original VA loan, your ability to secure a second VA loan may be limited by your remaining entitlement. You may need to consider selling the first property or refinancing it into a conventional loan to free up your VA loan entitlement.
5. VA Lender Requirements: Even if you qualify for a second VA loan, lenders may have their own requirements and restrictions. It’s essential to work with a lender who understands VA loans and can guide you through the process, ensuring you meet all necessary criteria.

How to Convert Your Old Home into a Rental Property with a VA Loan

You can convert your old home with VA financing into a rental property, turning it into an investment and using your remaining entitlement to purchase a new primary residence. However, if you choose this route, you’ll need to meet several strict underwriting guidelines, including:

• Demonstrating prior experience in managing rental properties or having a background in property management.
• Maintaining at least six months of cash reserves.
• Providing any existing lease agreements.
• Accounting for a 25% deduction from your rental income to factor in potential vacancies.

Understanding VA Loan Eligibility

Before diving into the specifics of using VA loans for a second home, it’s essential to understand the basic eligibility requirements for a VA mortgage loan:

1. Service Eligibility: To qualify for a VA home loan, you must be an active-duty service member, veteran, or eligible surviving spouse. The length of service required depends on when you served, but typically, it requires 90 days of active service during wartime or 181 days during peacetime.
2. Certificate of Eligibility (COE): To obtain a VA loan, you need a Certificate of Eligibility, which confirms your entitlement. You can apply for a COE through the VA or your lender.
3. Satisfactory Credit: While the VA does not set a minimum credit score, most lenders prefer a credit score of at least 620.
4. Sufficient Income: The VA loan program requires that borrowers have stable and sufficient income to cover their mortgage payments and other obligations.
5. Primary Residence Requirement: The VA loan program is intended for the purchase of a primary residence. This is a key factor when considering the possibility of using a VA loan for a second home.

Summary of VA Loans for Second Homes

Remember, if you’re planning to purchase a second home using a VA loan, you must intend to occupy the property. While the VA does not specify how long you need to live in the home before selling it, most VA lenders typically include a 1 year minimum occupancy requirement in the loan paperwork.

In conclusion, while the VA home financing is primarily designed for purchasing primary residences, it is possible to use a VA loan for a second home under specific conditions. Whether you’re relocating, using your remaining entitlement, or seeking a subsequent VA mortgage, understanding the requirements and limitations is crucial. Always consult with a knowledgeable lender and review your options carefully to make the best decision for your financial situation.

By carefully navigating the complexities of VA loan eligibility and understanding the specific rules for using a VA loan for a second home, you can maximize the benefits of this valuable program while ensuring you remain in compliance with VA regulations.