VA Loans for Investment Properties: A Comprehensive Guide

The VA home loan is the most generous form of home financing available. That’s because this loan can be had for zero down and a low interest rate, with low or no credit requirements and no mortgage insurance required. But you have to qualify as a veteran or active military member. Yet if you are eligible, you can use a VA loan to purchase a property that can generate rental income, with certain limitations.

Find out more about VA loans, how they work with investment properties, ways to qualify, terms and costs, advantages and disadvantages of using a VA loan for an investment property, and alternative options to consider.

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What a VA loan is

A VA loan is a financing vehicle backed by the US Department of Veterans Affairs and offered by participating private lenders. It is coveted as the most generous home financing option on the market for the following reasons:

• No down payment or mortgage insurance is required.
• VA loan interest rates and payment terms are often better than those of conventional mortgage loans.
• There is no minimum credit score required, making it easier to qualify.
• There is no loan limit with full entitlement if you can afford the loan.
• The VA will back loans in all areas of the country, regardless of the home price.
• Closing costs can be less, which may be paid by the seller, lender, or any other party.
• There is no penalty or fee for repaying your loan early.
• VA loans are assumable – meaning you can allow a buyer to take over your mortgage when you sell the home,
• You can write off all of your VA loan interest payments on your annual tax return.

However, not everyone qualifies for a VA loan. You must be an active duty service member or veteran with an honorable discharge, including those in the National Guard and Reserve service members, or an eligible surviving spouse.

How VA loans for investment properties work

VA loans are intended to help eligible borrowers afford a primary residence. As such, the borrower must occupy the property as a primary residence under most conditions. VA loans cannot be used to purchase commercial or investment properties outright.

Still, if you follow the rules, there are ways you can use a VA loan to buy a property that can be used to generate rental income, including the following:

1. Purchase and remain in your primary residence but rent out a portion of your home. “If your home is large enough for you to rent out a bedroom or even a guesthouse, a VA borrower can rent that out,” says J. Keith Baker, professor of accounting and finance at Dallas College in Irving, Texas.
2. Buy a multiunit property with up to four units, remain living in one of the units as your primary residence, and rent out the other units.
3. Refinance to a non-VA loan. Doing so can remove the primary residence occupancy requirement, allowing you to rent out the property entirely to someone else.
4. Pay off your VA mortgage early. Once you fulfill your loan requirements and pay off your balance in full, you are entitled to use the property as a rental/investment property as you see fit.

“Good candidates for pursuing one of these options are military members or veterans interested in house-hacking and who are comfortable living in and managing a rental property. It may not be suitable for those looking for a standalone investment property,” says Lauren Mendoza, founder/CEO of Bank Standard.

Investment property VA loan rules and requirements

You can use a VA loan to purchase a new or used single-family residence, condominium, townhome, manufactured home, modular home, duplex, triplex, or four-plex. The property bought cannot be used solely for investment or rental purposes, however.

You are required to take occupancy of the property as your primary residence within 60 days of closing, in most cases. Also, you must live in the home as your primary residence for at least 12 months before being allowed to rent it out. Fortunately, you can bypass this waiting period and occupancy rule if the military permanently restations you to a different site.

Your eligibility for a VA loan will also depend on when you served in the military. Most military members or veterans need to have been on active duty for at least 24 consecutive months, or a minimum of 90 days for reserve members and those discharged early. You will also need a Certificate of Eligibility (VA entitlement), which indicates how much the VA will guarantee on home loan financing and the amount you can borrow without having to put anything down.

While the VA loan doesn’t technically have minimum credit requirements, some lenders require a credit score of at least 620.

The good news is that VA loan limits no longer apply to qualified veterans who have full VA loan entitlement. Otherwise, currently, the standard VA loan limit is $726,200 in most U.S. counties; in high-cost counties, the limit maxes out at $1,089,300 for a single-family home.

Investment property VA loan terms and costs

VA loans are available in either 15-year or 30-year terms with fixed interest rates. Often, the fixed rates for a VA loan are lower than those offered by any other home loan.

VA loan costs are relatively low, considering that you will not be required to make mortgage insurance payments and your interest rate will be competitive. But be aware that putting no money down means your loan amount borrowed will be larger than if you had made a down payment. Also, you will have to pay a VA funding fee, which amounts to typically 2.3% of your loan.

Additionally, note that, as with any home loan, you will pay closing costs on a VA loan, which can equate to 2% to 6% of the cost of the purchased property.

Pros and cons of using VA loans for an investment property

As mentioned earlier, the VA loan offers a plentiful array of benefits, including no down payment required, a low fixed interest rate, minimal credit restrictions, and tax advantages. That means using a VA loan to purchase a property that will help you generate rental income can be a smart strategy if you qualify. That rental income can help offset your mortgage payment.

But on the flip side, you can only qualify for a VA loan if you are a veteran, active duty service member, or surviving spouse and have the necessary entitlement. Also, you will have to pay a funding fee of 2.15% of your loan amount, and you cannot exceed the VA loan limit for the county you’re looking to purchase in. Furthermore, you can’t use a VA loan to purchase a property solely for investment purposes; this property must also be used as your primary residence.

In addition, be aware that, while you can buy a mixed-use property that is owned for both commercial and residential use, the commercial space within that property can’t be larger than 25% of the total square footage or exceed more than four units. Other rules apply as well.

Alternatives to VA loans to purchase an investment property

You aren’t limited to a VA loan if you want to finance a property that can also generate rental income. Instead, you could consider a conventional loan backed by Fannie Mae or Freddie Mac (instead of the government), which would allow you to rent out the property without as many rules or occupancy requirements. But you will probably pay a higher interest rate and be obligated to make a down payment – possibly 20% down.

Alternatively, consider an FHA loan, which can be had for as little as 3.5% down with a 580 credit score for 10% down with a 500 credit score. But many of the same primary residence occupancy rules and property type limitations apply.

Or, if you qualify, it may be worth exploring a commercial property loan or investment property loan.

The bottom line

The VA loan offers several valuable perks that can get your foot in the door of a property that produces rental income, so long as you are willing to remain in that property as your primary residence. You likely won’t find a more affordable or generous loan product.

But if your goal is to be a more aggressive investor and generate more appreciable returns, other loan options can enable you to purchase properties with fewer restrictions. Weigh your options carefully and shop around for loan products from many different lenders.