A lot of confusion surrounds Veteran Affairs (VA) Loans, especially when it comes to rental property. The questions on social media abound. Sometimes the questions are simply whether a property purchased with a VA loan can be rented. Other questions involve the number of times a VA Loan can be used, whether two VA loans can be held at once, and the list goes on. To help provide some clarity, here is what to know about VA loans and rental property.

The VA Loan is a wonderful program that has helped generations of service members, veterans, and their families realize their dreams of owning a home. It even provides the opportunity for VA Loan holders to retain their homes in times of temporary financial hardship.

But, the rules for acquiring a VA Loan have to be considered if you are a real estate investor. Entitlement, personal circumstance, finances, and other factors all play a part in deciding whether using your VA Loan benefit is the right move for you.

The VA Loan

The VA Loan was created by the original G.I. Bill (Servicemen’s Readjustment Act of 1944). While VA Home Loans are provided by private lenders (e.g., banks, credit unions, mortgage companies, etc.), the VA guarantees a portion of the loan. Because of the VA’s guaranty, lenders can offer more favorable terms.

The VA home loan guaranty means the VA agrees to reimburse a lender should the property go to foreclosure. The guaranty also takes the place of your down payment, which can allow a buyer to purchase a home they might not otherwise be able to afford.

Benefits of VA Loans

There are plenty of benefits a VA Loan affords. Some of the benefits that make VA Loans so attractive include the following:

No down payment as long as the sales price is at or below the home’s appraised value (the value set for the home after an expert review of the property), so 100% financed
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’s price
Competitive terms and interest rates from private banks, mortgage lenders, or credit unions
No need for private mortgage insurance (PMI) or mortgage insurance premiums (MIP)
Fewer closing costs, which may be paid by the seller, lender, or any other party
No penalty fee for paying off the loan early
Access to VA loan staff who can answer questions, just call 1-877-827-3702

Who Is Eligible

VA loans are available to active-duty service members and veterans with other than dishonorable discharges and National Guard and Reserve service members and veterans with an honorable discharge. Certain eligible spouses and other uniformed service personnel may also be eligible. The full listing is available online here.

Other eligibility requirements include your finances and intent for the property. You must be able to afford all your VA loans at the same time, and the subsequent home must become your residence. So, if you want to buy a rental property with your VA loan benefit, no dice! That is not how VA Loans are intended to be used. However, if you buy a property and live in it as a residence and later move for virtually any reason, then there is usually nothing stopping you from renting the property.

Key Points for VA Loans

Here are some key points to remember about VA Loans.

You must be able to afford all the loans at the time of closing
The home you purchase must be your residence, i.e., you will live in the home being bought with the loan
You must move into the new home within a reasonable time frame, typically within 60 days of closing on the house

VA Loan Entitlement

The thing to know about entitlement is this is the amount that the VA guarantees it will pay the lender and it is offered in place of your down payment. It does not cover the entire house. You can still end up in foreclosure. Nevertheless, lenders look favorably on VA-guaranteed loans because if the loan does go to foreclosure, it is much easier to recover their money after receiving the entitlement amount from the VA.

Full Entitlement for VA Loans

As of 2020, if you have full entitlement, you don’t have a VA loan limit. What that means is that if you are a veteran, service member, or survivor, you don’t have to pay a down payment for loans over $144,000. Instead, the VA will guarantee to pay your lender up to 25% of your loan amount. However, at least one of these must be true:

You have never used your home loan benefit
You have completely paid off your previous VA loan and sold the property
You have used your home loan benefit, suffered a foreclosure or short sale, and repaid Veteran Affairs in full

Of course, this doesn’t mean you can or should get any size loan you want. When you apply and are eligible for a VA-backed home loan, you’ll receive a Certificate of Eligibility (COE). Many banks will help you through this process.

The COE makes the VA loan less risky for the lender, which generally results in better terms for the borrower. However, you still need to qualify for the loan, and the bank still needs to ensure you can afford the loan.

Factors like your credit history, income, assets, etc. will determine your eligibility. The rest of the loan process is more or less standard. If you want to learn more about loan eligibility, you can check out my previous article, Anatomy of Mortgage Loan.

Find out how to apply for a COE

When you receive your COE, it will contain a statement, like “This Veteran’s basic entitlement is $36,000.” That number will undoubtedly change over time, but here is what you need to know. That number is actually for your lender.

Veteran’s Basic Entitlement for VA Loans

If the Veteran’s Basic Entitlement shows $36,000, that is the total amount the lender will receive if you default on a loan that is under $144,000. For loans over $144,000, the VA will guarantee to your lender that they will pay up to 25% of the loan amount.

Remaining Entitlement for VA Loans

So what if you don’t qualify for Full Entitlement? In that case, you may have remaining entitlement, and you do have a home loan limit. In other words, if you used your VA home loan benefit and want to buy another home without selling your previous home, you will not have full entitlement, but you may have partial entitlement.

One of the questions I commonly see on social media is how to calculate or determine remaining entitlement. To do that, here is what you need to do:

Request an updated certificate of eligibility to see how much entitlement you have already used. (Unless you already know)
Calculate 25% of the FHFA Conforming Loan Limit (‘One-unit’ column) for the county where you want to purchase your next home. If this amount is higher than your used entitlement, the difference is your ‘remaining entitlement’.

Uh oh! I know. That is clear as mud, right? Let’s unpack that a little bit. First, we need to know a little more about this FHFA Conforming Loan Limit (CLL). Let’s start with that unexplained acronym. FHFA stands for Federal Housing Finance Agency. Then there is CLL. The CLL is the maximum amount on the size of a mortgage that the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., a.k.a Fannie Mae and Freddie Mac, will purchase or guarantee. Mortgages that meet the criteria for backing by these organizations are known as conforming loans.

Okay. now you know a little bit about FHFA, CLL, and Fannie Mae and Freddie Mac. But, what does all this have to do with your Remaining Entitlement? Well, the CLL, set by the FHFA, is used to calculate your Remaining Entitlement. That said, you need to identify the CLL for the property you plan to purchase and calculate your remaining entitlement.

Calculating Remaining Entitlement for VA Loans

Request a new certificate of eligibility and note your used entitlement. Options include:
1. Apply through your lender.
2. Apply online: Go to www.VA.gov. You can log in using your current Digital Service (DS) Logon or by creating a new account using ID.me.
3. Apply by mail: Obtaining a COE by mail may take longer than requesting via the Internet or VA system–fill out VA Form 26-1880 (Request for Certificate of Eligibility) and mail it to the address of your state listed on the back of the form.
4. If you are an eligible spouse, see Appendix E: Eligible Spouses of the VA Home Loan Guaranty Buyer’s Guide for more information.
Look up the CLL for the county where your desired property resides. CLL values can be found at this link. For example, let’s assume a property I want to purchase is in Richmond County, GA. I’ll refer to the 2022 Conforming Loan Limit Values section of this page, download the corresponding PDF, and search it for Richmond County, and I will see the CLL Value for a one-unit (single-family) property is $647,200.
I then need to multiply the CLL value I found above by 25%. So, the calculation results in 0.25 x $647,200 or $161,800.
Now, to calculate my remaining entitlement, I just need to subtract my used entitlement from the value I just calculated. So,
Remaining Entitlement = (25% * Your CLL) – Used Entitlement.

Congratulations! You now know how to calculate your remaining entitlement for VA Loans. Keep in mind, that the remaining entitlement is the maximum amount the VA will agree to pay the lender if you default on your loan. However, the VA still will not agree to pay your lender more than 25% of the loan amount.

So, there is a strong chance you have a substantial remaining entitlement. The question now becomes, should you use it?

Are VA Loans Right For Purchasing Rentals?

If you are considering using your VA Loan benefits to buy a rental property, let me begin with this. You cannot use a VA loan for rental properties–at least, not directly. The same applies if you consider using the property as a vacation home. Remember, the VA Loan is met for those who intend to occupy a home as a residence. So, if you plan to use your VA Loan benefit to acquire a rental property, you must plan to live in it first.

So, does it make sense for you to use your VA Loan if you are building a rental portfolio? As with so many other questions in life, the answer depends. Factors like whether you are on active duty or need a place to live for a couple of years will contribute to your decision.

For instance, if you are active duty military, newly assigned at your duty station, using your VA Loan benefit might not be a bad idea. That is especially so if you don’t have the savings needed to make a 20% or more down payment on a property. In this situation, you can buy a property, live in it while assigned, and turn it into a rental when you move to your next assignment. When you arrive at your next assignment, you can repeat the process, and so on, until your available entitlement is depleted. It’s a great way to create an initial portfolio with little to nothing down.

For other options, like buying a turn-key rental property, a wholesale property, or an auction property, VA loans probably won’t be an option. That stipulation about buying a property as a residence is a major stipulation. Additionally, VA Loans come with a lot of bureaucracy, inspections, and other requirements that prevent you from moving quickly to capitalize on great deals.

Other Factors To Consider With VA Loans

Before committing to a zero-down VA Loan there are some other factors worth considering. After all, you are seeking to make sound investments.

Equity

Consider the total cost of the loan compared to the total cost of the property. With the added cost of the VA funding fee, you could ultimately end up with a loan that exceeds the market value of your house. As a result, you could find yourself with a home that has little, no, or even negative equity.

Market values for homes can also drop, so if you begin with little equity in your home, it can quickly go negative. That can be a problem if you do decide you need to sell your property later. That happened to me back in 2008 when the housing market bubble burst. I owned a home that I purchased with a VA loan with little down.

I planned to sell the home when I left my duty station; however, because of the new market, it would have cost me thousands of dollars to do so. That is actually how I got into the rental business in the first place. I talk about my entry into real estate investing in my book, so I’ll spare the details here.

VA Funding Fees

You will be required to pay VA funding fees. This is a one-time payment that helps to lower the cost of the loan for U.S. taxpayers since the VA home loan program does not require down payments or monthly mortgage insurance.

Note that the following do NOT pay the VA funding fee:

Veteran receiving VA compensation for a service-connected disability.
Veterans who are entitled to receive VA compensation for a service-connected disability, but receive military retirement pay in lieu of compensation or Active Duty pay.
Surviving spouse of one who died in service, from a service-connected cause, or totally disabled; and is receiving Dependency and Indemnity Compensation (DIC).
Service members with a proposed or memorandum rating from VA, prior to loan closing, as eligible to receive compensation because of a pre-discharge claim.
Service member on Active Duty who provides, on or before the date of loan closing, evidence
of having been awarded the Purple Heart.

For everyone else, Congress established the funding fee rates for loans closed on or after January 1, 2020, at the levels listed below (See Appendix C of the VA Home Loan Guaranty Buyer’s Guide:

Down Payment	First-time Use	Subsequent Use
None	2.30%	3.60%
5% or more	1.65%	1.65%
10% or more	1.40%	1.40%

These values apply to Purchase and Construction Loans. Note: Reduced fees only apply to purchase loans with a down payment of at least 5 percent. Best VA Funding Fees are granted when the buyer places a down payment of 10% or more.

I also see posts with concerns about the fees associated with using your VA Loan benefits beyond its first use. As you can see from the table above, this only applies if you are providing a down payment of less than 5%. If your down payment is more than 5%, the fees are the same, and substantially lower.

Cash Flow

One of my first considerations when choosing whether to purchase a property is whether or not it will cash flow. Hypothetically, let’s say you buy a 100% financed property and fees are wrapped up in the loan as well. Let’s also assume you paid market value for the home. You then live in the house for one to two years, and you decide to turn it into a rental when you move.

The problem with this situation is after two years, very little of the property’s principal has been paid down. Since you also financed 100% of the loan plus fees, your monthly mortgage payment will be higher than if you made a substantial down payment. As a result, your rental will likely have a negative cash flow, meaning you will have to pay out of pocket every month to cover a portion of your mortgage. All maintenance expenses, HOA fees, assessments, etc. will come out-of-pocket as well.

This situation can drain your finances and cause financial hardship later. So, you need to know your market. Make sure rental rates in the area you plan to purchase will allow you to cover your expenses and generate a cash flow. Do this before you lock yourself into a property with little equity.

Resident Requirement for VA Loans

Many, NOT ALL, VA home loan agreements have a clause stipulating that you must occupy the house for at least 12 months. At the end of that 12 months, you’ll likely be able to rent the house to a tenant, but confirm this with your lender.

Occupancy requirements must be considered before you commit to a loan with your lender. Have them show you in their agreement the duration you must occupy the property to meet the VA Loan’s occupancy requirement.

If you don’t like their terms, consider other lenders. You should do this anyway if you want to find the best interest rates and other terms. They are not all the same.

Drawbacks of VA Loans for Rental Properties

Before committing to a loan for a property you plan to rent, you should check with your lender to confirm that renting it will not trigger some instant payment requirement. This applies to all loans, not just VA Loans.

I have not run into this issue myself, but some reports indicate that neglecting to request ‘consent to let,’ or permission to rent your property, could result in a demand for the instant repayment of your whole mortgage. That is something that most homeowners cannot afford.

Seller Resistance to VA Loans

Some sellers may be resistant to VA financing. The VA Loan program is known to have some draconian requirements that sellers must meet before the property can be approved. Often a home inspector will have to inspect the property to ensure it meets all VA-specified standards. The result is that more money and time have to be expended by the seller before you can close on the property.

These issues may not be a show stopper for a motivated seller, but if the seller has a cash buyer or even someone purchasing with a conventional loan, it may be less headache for the seller to go with option B or C.

Lender Understanding of VA Loans

When it comes to VA Loans, all lenders are not the same. The lender you work with may not be accustomed to working with VA Loans. They may not even offer VA loans. Your best bet here is to shop around and find lenders who are familiar with VA Loans and offer favorable terms Not All Lenders Offer – or Understand – VA Loans.

Dream Home

A final drawback to using your VA Loan benefits is what happens if you find your dream home. Let’s face it–dream homes don’t usually come cheap, and they seldom fall into the filters we set for investment properties. You may actually need a little assistance to make that dream home yours.

The drawback, however, is if you don’t have enough remaining entitlement, that dream home may be beyond your grasp. That’s just food for thought!

Summary

VA Loans are a tremendous benefit for service members, veterans, and eligible spouses to achieve the dream of obtaining a home. There is also a little leeway within this program to begin a rental property portfolio, provided you play by the rules.

Personally, at this point in my real estate investing journey, I seldom consider VA Loans. Instead, I generally pursue conventional loans for rental properties. When I call the lender, I lead with I want to buy a rental property. To achieve most of the same benefits, I’d gain from a VA Loan, I usually commit to paying 25% down for the property. This also gets me out of paying PMI and MIB, and I receive the property with equity and a lower monthly payment. All of these factors help ensure I obtain a rental property that will cash flow.

Good luck, and happy investing!

More Assistance For VA Loans

If this article didn’t answer all your questions, there is still hope. You can contact the VA with questions about VA Home Loan benefits or issues with your current home loan. Call 1-877-827-3702.

There are also several references you can consult. Here are some I consulted when writing this article.