As the spouse of an active duty service member, I can honestly tell you that I attribute the humble beginnings of our investing career to the VA loan. The 0% down VA loan allowed us to fund two different houses. Once we were transferred, we rented the house. This was a great way to get into a house with low entrance costs.
While I am no expert in VA loans (let’s just call me an experienced landlord who has limited funding and likes to exploit every legal resource to fund her empire), I have learned a lot over the years. Since I have seen a lot of questions on the VA loan in the Forums, I wanted to put together this guide based on personal experience and what I have learned over the years. As always, this is only a good starting point and a way to do some preliminary homework before you get started. It does not replace a knowledgeable broker, so make sure you research and find a great broker.
VA Loan: Who’s Eligible?
The first thing to looking into is who is eligible to use the VA loan. The great thing is it extends far beyond current active duty members. The following eight types of people are eligible to use the VA loan:
- Veterans
- Current or former National Guard or Reserve members who have been activated Federal active service
- Active duty service members
- Current National Guard or Reserve members who have been Federal active service
- Discharged members of the National Guard who have never been activated for Federal active service
- Discharged members of the Selected Reserve who have never been activated for Federal active service
- Surviving spouses in receipt of DIC (Dependency and Indemnity Compensation)
- Surviving spouses not receiving DIC benefits
This is the link to find out more information on whether or not you are eligible.
Types of Purchases a VA Loan Can Fund
As an investor, I love 0% down loans. Unfortunately, a VA loan, while amazing in the fact that it has no down payment requirements, is very specific regarding what it can be used for. If you or your dependents are unwilling to live in the house, this loan will not work for you. This is a federally sponsored program, and there are very specific requirements to what can be bought with a VA loan.
As defined by the VA, the loan can be used for these five types of homes. As mentioned above, all of these must be your personal home. The specific VA wording can be found here.
- Buy a home or 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.
A Few Notes on Home Types
Condominiums
Personally, I will not buy a condominium. The VA, FHA and other government-approved loans have very specific requirements regarding condominium funding. At one point (not sure if it is still in play), complexes that had more than 30% that were rentals were not eligible for these programs. This causes many areas to lose the ability for future buyers to buy into the complexes.
Once these complexes were no longer eligible to meet these requirement,s these units sat longer and even lost value. To further exacerbate the problem, many condo communities have or create rules regarding the number of rentals allowed, or they forbid it all together. This creates a huge issue regarding an exit plan.
This is why I don’t buy condos and I check all HOAs very closely to make sure there are no laws against making my home a rental once I move out of the area. As an investor my number one protection is the ability to rent my home.
Multiplexes
The VA allows you to buy a single family, duplex (2 units), triplex (3 units) and a fourplex (4 units). The key is that you have to live in one unit, but you are still allowed to rent the other unit(s) out. The great thing is the VA loan will count the income of the other properties when helping you qualify for this property. Therefore, one can oftentimes qualify for a more expensive property.
Defining VA Loan Eligibility
Now that you know what type of property you want to live in, the key is to figure out how much property the VA loan will allow you to purchase with no down payment. Unfortunately, it’s not as simple as it sounds because it’s based on your location; there is not a universal rule for the entire country. The lowest total amount is $417,000 for a single family. All the numbers after that are based on location and the number of times the loan has been used.
The VA location list to check eligibility can be found here. The key to remember is that the VA eligibility is not your final amount of the loan available. It is simply the amount that you can borrow at 0% down. A lessor known fact is that you can exceed the VA loan; you simply will have to put down a down payment.
What Types of Fees Does the VA Loan Entail?
While there is no PMI in regard to the VA loan, there is a funding fee. This helps cover the costs of the loan and for those who default. The funding fee changes based on the number of properties that you borrowed. The funding fee increases as you increase the number of properties. The funding fee can be rolled into the loan price.
| Type of Veteran | Down Payment | % First Time Use | % Subsequent Use |
|---|---|---|---|
| Regular Military, National Guard, and Reservists | Under 5% | 2.30% | 3.60% |
| 5% – 9.99% | 1.65% | 1.65% | |
| 10%+ | 1.40% | 1.40% | |
| Qualifying Disabled Veteran | Under 5% | 0% | 0% |
| 5% – 9.99% | 0% | 0% | |
| 10%+ | 0% | 0% |
VA Purchase Loan Fees – VA.gov
How to Waive the Funding Fee
Another lesser known fact is if you have a VA disability rating, then you might qualify for the fee to be waived or reimbursed. There are five groups that can get their funding fee waived.
- Veterans receiving VA compensation for service-connected disabilities
- Veterans who would be entitled to receive compensation for service-connected disabilities if they did not receive retirement pay
- Veterans who are rated by the VA as eligible to receive compensation as a result of pre-discharge disability examination and rating or on the basis of a pre-discharge review of existing medical evidence (including service medical and treatment records) that results in issuance of a memorandum rating
- Veterans entitled to receive compensation but who are not presently in receipt because they are on active duty
- Surviving spouses of veterans who died in service or from service-connected disabilities (whether or not such surviving spouses are veterans with their own entitlement and whether or not they are using their own entitlement on the loan) — depending on your house price this could add up to a significant amount of money
3 Ways to Verify Your Exempt Status
- Have a properly completed and signed VA Form (26-8937) and a Verification of VA Benefits indicating the borrower’s exempt status.
- If you are a veteran who elected service retirement pay instead of VA compensation, you will need a copy of the original VA notification of disability rating and documentation of your service retirement income.
- You will need to indicate on the Certificate of Eligibility (COE) that the borrower is entitled as an unmarried surviving spouse.
Using the VA Loan to Fund Multiple Loans
The great thing about the new VA rules is that you are only given a set amount, but you can buy as many houses as you want as long as you don’t exceed your entitlement. The limiting factor isn’t the number of houses; it’s the entitlement amount. It is important to remember your entitlement includes the purchase price AND the funding fee (described below) of your location.
To Figure out Your Entitlement
Equation: Current Location Entitlement – Previous Entitlement(s) if you have multiple (Funding Fee included) = amount you have left.
Personally, we have bought two houses with the same loan. Our first house was bought in Virginia Beach. We paid $234,000, and after the funding fee, we had used $239k. We then bought a $163k house in Hanford, CA for $168k after financing. While these are off the top of my head, the point is you can totally buy multiple houses. The key is to make sure you have money left over from the first house so you can use it again.
The great thing with these rules is that you are rewarded for buying cheaper homes. This has worked great for us, as we buy the “worst” house in the best neighborhoods. These of course are the smaller houses typically, but that has also been great, as we have found those have the biggest bang for the buck.
Note: Your entitlement amount is based on your current location, not where you first used the loan. Currently, we have used up a little less than $417,000, so most locations we would move to would not have anything left on the loan. That being said, there are a few places that have a top limit of closer to a million. In one of those locations, we would be able to use the difference (approx. $500,000) to buy another house.
This is great to keep in mind because if you are “out” in one location in regard to your VA loan eligibility, it does not mean you should not have your mortgage broker check your eligibility in the next place you go. It never hurts to ask; you could be missing out on an opportunity!
How to Finance Above Your VA Loan
As mentioned above, the VA loan does allow you to finance above your VA loan amount. The key thing to note is anything above the VA funding amount requires a down payment of 25%. So if you go above your funding amount by $10,000, you will now owe a down payment of $2,500. If you need a much higher amount, this can add up quickly.
Note on Why You Might Go Above Your Entitlement
The last I checked, VA rates were lower than most conventional rates. Depending on the rates for conventional loans, this loan could make sense even with the funding fee. It is important to check all the rates because these change. Even with the funding fee and having a down payment amount, this might have a lower payment than another type of loan, especially if you qualify for the funding fee to be waived.
This article has been edited by David Pere, a VA loan expert.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.