Can You Have A Second Mortgage With A VA Loan?
You’ve lived in your home for a while now, your kids are grown, and you have some extra money to spare. You begin to wonder if investing in real estate is a smart move. You have a VA loan for your current home, but are you eligible to apply for another? The answer is probably “yes,” but it’s essential to understand how this process works and the limitations. Hint: It’s very different from traditional loans.
How Many VA Loans Can You Have?
VA loans are home loans backed by the U.S. Department of Veterans Affairs (VA). These unique mortgages allow eligible servicemen or women, veterans, and some military spouses the opportunity to buy a home using benefits reserved exclusively for military members. These benefits include a $0 down payment, no PMI (private mortgage insurance), and lower interest rates.
There are several scenarios where you may obtain another VA loan. One scenario is if you’ve already purchased a home with a VA loan, you sell it and use another VA loan to buy a new property. You are restoring your entitlement benefit by selling your house to buy another.
VA entitlement = the dollar amount the VA will repay a lender if you default or fail to repay your mortgage. If you meet minimum loan requirements, most lenders will loan you up to 4x the amount of your basic entitlement without requiring a down payment. Entitlement protection encourages lenders to offer VA loans with lower rates, no down payment, and more accessible guidelines to qualify.
You don’t always have to sell your house or move to take advantage of another VA loan, though. You can carry two VA loans for two different homes simultaneously in many cases. If you’d like to use a second VA loan to purchase an investment property, a VA lender will need to ensure that you have the means to pay both of the loans back at the same time, among other requirements (see below).
Buying An Investment Property With A VA Loan
Although you can purchase a second property as an investment with a VA loan, there are some severe caveats you’ll want to think about. VA loan programs help borrowers afford permanent residences, not rental properties. However, there are exceptions.
If your home is paid off, and you use a VA loan to buy another property that you intend to live in, you could rent out your old home to make passive income. Since you paid off your first VA loan, your entitlement would be restored, allowing you to purchase again. The vital thing to note is that a VA loan must be used to buy a home you intend to live in.
If you don't have your current VA loan paid off, you should know that your ability to get another VA loan may be impacted by whether you have any remaining entitlement dollars left. If you do, and you purchase a second property, you will have to show that you can afford both mortgages.
In most cases, someone can take out a second VA loan to purchase a home if they are stationed at a different location but don’t want to sell their existing home. In this case, they could decide to rent out the existing property and buy another one. The rule here is that VA borrowers can’t convert their primary residence into a rental and buy a similar-sized home in the exact location. The second home would have to be a larger residence for a growing family or be in a different area.
Most borrowers opt to generate rental income by buying a multi-unit primary property, i.e., they live in one unit and rent out the others.
How To Get A Second VA Loan
Getting a second VA loan will likely feel quite similar to your first VA loan. Here’s a quick guide to the process:
- Request your certificate of eligibility. This will prove to lenders that you’re qualified to receive a VA loan, and it’ll also help you understand how much of your entitlement benefit is available for use
- Determine if you want to restore your full entitlement. If you’re planning to buy a new home, you might want to think about selling your current home to get your full entitlement benefit
- Get your finances in order. While the VA doesn’t have a minimum credit score requirement, VA lenders typically do. So, if you’re planning to apply for a second loan, be sure to review your credit report, pay off credit cards and take other steps to demonstrate you’re equipped to pay your new monthly mortgage payments
- Be prepared for second VA loan funding fees
The funding fee is a guaranteed expense on VA loans, and you could wind up paying more for it on your second loan. If you make a down payment of less than 5 percent of the purchase price the second time you take out a VA loan (and any other time after), the funding fee will be 3.6%. If you can make a down payment of more than 5% or more than 10%, the funding fee comes down to more reasonable levels of 1.65% and 1.4%, respectively.
Learn more about VA home loans from MHS here.