Many Veterans find interest in renting out their home current home and purchasing a new one.
Not everyone’s cut out to be a landlord. But if that’s on your radar, VA buyers can use their benefit to purchase a home, live in it for a time, and then rent it out as an investment property.
It’s even possible to purchase a new home with another VA loan while renting out the old property.
Here are five big things you need to know.
VA loans have occupancy requirements, and you’ll sign mortgage documents that indicate you plan to live in the home as your primary residence, at least for a specific time frame. But when you’re in the clear, you can look to rent out your current home without having to refinance out of your current VA loan.
That’s important because some refinance loans will come with their own occupancy requirements, not to mention the costs associated with closing on that new loan.
But some limitations arise when you’re keeping your old VA loan and trying to buy again with a new one. The big one revolves around what’s known as VA loan entitlement.
Veterans keeping their old property under a VA loan will not have the full reach of their VA loan entitlement for their next purchase because at least some remains tied up in that other home. The idea of VA loan entitlement can get confusing in a hurry, but it reflects the government’s financial guaranty on any VA loan.
Buyers with less than their full entitlement may need to make a down payment for their next purchase. There’s also a minimum loan amount of $144,001 in most cases.
Assessing your entitlement situation usually requires a look at your Certificate of Eligibility and information about where you plan to purchase. While they no longer apply to borrowers with their full entitlement, the VA’s loan limits play a key part in determining your remaining entitlement and how much you can borrow before needing a down payment.
Veterans wanting to avoid a down payment or other limitations can refinance out of their VA loan, repay the original loan in full and fully restore their VA loan entitlement. But if you’re still planning to hold onto the home you purchased with a VA loan; there’s a catch.
Fully restoring your entitlement in situations like these is a one-time deal. Normally, the only way to fully restore entitlement is to repay the old loan in full and get rid of the property, typically selling it to a new buyer. Under what’s known as one-time restoration of entitlement, Veterans have one opportunity to fully repay a loan and keep the property instead of selling it.
Getting your full entitlement back means being able to purchase without a down payment. But invoking the one-time restoration carries an additional consideration: If you ever want to restore any of your entitlement again, you’ll first have to get rid of every property you purchased with a VA loan.
Having one mortgage payment already can make it tough to qualify for a new loan. One of the big attractions of turning your primary residence into a rental is, of course, generating rental income.
But you might not be able to count the future rental income you’re expecting, even if you have a renter lined up when you’re ready to close on your next purchase. You might need at least a two-year history of receiving rental income (as documented on your income taxes) to count it as effective income toward mortgage qualification. That’s obviously all but impossible when you’re first looking to convert a primary residence into an investment property.
The good news is that projected rental income could still prove helpful. Some lenders might be willing to treat it as an offset, meaning the rental income could essentially cancel out the mortgage payment as a monthly debt.
You will likely need to get a new homeowners insurance policy that reflects the fact that your home is no longer owner-occupied. Without making that change, the insurer could wind up denying any claims you make once you have renters in place.
Talk with your homeowners insurance company and shop around for the best deal on policies for rental properties.
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