What is Acceptable Under VA Loan Guidelines?
For most VA-eligible borrowers, a VA loan is used to finance a single-family home. But, the VA Home Loan Guaranty Program has many eligible uses beyond single-family homes. Actually, it is acceptable for a VA-backed home loan under the VA guidelines to be used to finance all of the following:
· The purchase of a single-family house
· The purchase of a VA-approved townhouse
· The purchase of a VA-approved condominium unit
· The financing of a new home construction
· The purchase of a fixer upper (in some cases)
· Up to $6,000 for “green” upgrades
· The cash-out refinancing of an existing mortgage (VA or other)
· The interest rate reduction refinancing of a VA loan (Streamline)
Owner Occupied Only?
The VA has guidelines for VA-approved lenders to follow for acceptable VA loan use. The guidelines state that VA-guaranteed mortgages will be approved for properties that are owner occupied. The guideline applies to every eligible use for VA loans except VA to VA streamline refinance. It’s important to remember that one of the main reasons for the VA mortgage program is to assist veterans in the purchase of homes that they can live in.
In What cases is VA Approval Necessary and Why?
The details surrounding the purchase of a single-family dwelling may be self explanatory. But, the other acceptable uses could use some further explanation. For instance, townhouse or condominium units considered for VA loan financing must meet VA approval before they can be processed. The reasoning behind this is that in order for a property to pass VA inspection, certain building codes must be followed for the owner’s safety. A list of approved condos and townhomes can be found on the VA website.
VA Loans and New Home Construction
Another type of property that must meet strict VA guidelines is new construction. Not all lenders offer VA loan financing for new construction. However, the ones that do must follow VA guidelines. The guidelines state that for the VA to provide its guaranty on new construction financing, the contractor must be registered as an approved builder with the VA. The VA-guaranteed loan must close before construction begins. And, the first VA mortgage payment is due upon construction completion. The builder is expected to maintain interest payments on the loan until construction is complete.
Giving an old house a new look is a popular American hobby. Now, buying a fixer upper, and using VA home loan to finance it, can be tricky. The rule is that a home needs to be “move-in” ready in order for the VA to provide its guaranty on an existing construction. Therefore, the “fixing” must be limited to mostly aesthetic upgrades rather than structural.
Energy Efficient Mortgages
In some cases, the “fixing up” may involve making a home more energy efficient. A very unique type of VA mortgage known as an Energy Efficient Mortgage (EEM) can be made for “green” upgrades. An EEM of up to $6,000 can be obtained to make “green” improvements like solar heating and cooling, weather proofing, furnace upgrades, new windows, and other related energy efficient improvements. The amount of the EEM will be added to the total amount of the first mortgage during purchase or refinance of a home using the VA guaranty.
VA Refinance Options
If a VA borrower wishes to refinance, he or she has several options when it comes to eligible use. First, a VA borrower can get cash out of equity to pay for things like debt consolidation, home improvements and even a family vacation. Another type of VA refinance loan is to simply replace a non-VA loan with a VA-backed one. The borrower can choose to take cash out of equity or not. The third type of refinance is from an existing VA loan to another VA loan, usually to reduce the interest rate. This is known as VA to VA Streamline and is popular when interest rate indices are significantly down.
Exceptions for Rental Properties and Multi-Unit Properties
Now, most of the eligible uses do not allow for a VA home loan to be used to purchase income property. The reason is that in most cases a property financed with a VA mortgage must be owner occupied. But, there is one type of property that allows for owner-occupancy and rental units at the same time. The purchase of multi-family dwellings is allowed under VA guidelines. A veteran or active duty military member can purchase a multi-unit (up to four units) property if he or she meets certain qualifications.
In order for a VA-eligible borrower to be considered for the VA guaranty on home financing of a multi-unit property the VA borrower must certify that he or she will occupy one of the units within a reasonable amount of time after closing. In order to lease the remaining units, the borrower must be able to prove prior property management experience. In addition, the VA-eligible borrower purchasing multi-unit housing must produce evidence that he or she has enough cash reserved for at least six monthly mortgage payments. The rental income anticipated to be made from the multi-family dwelling cannot be factored in as the first six months of payments.
The last stipulation having to do with multi-family housing and VA loans is the limit on the number of units for multi-family housing purchased with VA loans. It’s been stated that one borrower may purchase up to a four-unit property using a VA-guaranteed mortgage. If multiple VA-eligible borrowers purchase a multi-unit property together, then one additional unit per borrower is possible. For example, a sixplex can be purchase by two VA-eligible borrowers together. And, a seven-unit dwelling can be purchased by three VA-eligible borrowers together, and so on up.
What is NOT Acceptable Under VA Guidelines
Considering all the attractive ways in which the VA home loan benefit can be used, it’s no wonder so many VA borrowers are using the program. It is interesting to note that even though the program can be used to finance condos, townhouses and even multi-family housing, the majority of VA borrowers end up using their VA eligibility toward the purchase of single family properties such as houses.
But, some uses are NOT acceptable under VA home loan guidelines, like:
· Land with no plan for construction
· Rental property
· Business/residential property with more than 25% space designated for business
· Multi-family units that are not owner-occupied
Getting to the Specifics
The VA Home Loan Guaranty Program is meant to help military members finance homes in which they intend to occupy. It is not for meant for borrowers who do not meet the owner-occupancy requirements.
One use that does not meet owner-occupancy guidelines described by the VA is the purchase of unimproved land. Since undeveloped land does not have a safe and adequate dwelling as outlined by the VA, it does not qualify for VA financing. Some VA-approved lenders allow for a VA borrower to purchase land if it is planned for mobile home placement. Also, some VA-approved lenders will allow for land purchased for new construction. The rule of thumb is that land purchases financed VA loans must be intend for VA-approved home placement and owner occupancy within a reasonable time.
More limitations on VA home loan usage regard financing rental income property. The VA guidelines for home loan benefits do not allow for the purchase of a home for income purposes. The VA requires that a VA borrower sign documentation certifying that a VA-financed home be owner-occupied as a primary residence within a reasonable time. Therefore, most rental property does not meet VA owner-occupancy guidelines.
An exception may be multi-family residents. Some multi-family dwellings used as rental property can be financed with VA-guaranteed mortgages, but with restrictions. Military members are allowed to use VA home loan benefits toward multi-family dwellings only if the VA borrower occupies one of the units as a primary residence. There is also a limit to the number of units per VA borrower. Once the owner-occupancy rule is met, the remaining units may be rented out for income. Keep in mind that not all VA-approved lenders are willing to provide VA loans for multi-family dwellings.
Finally, purchasing a residence with the intention of running a business out of the home is sometimes an acceptable use for a VA loan. However, properties with businesses operated out of them can only be financed with a VA-backed loan if the business portion of the house does not exceed 25% of the total square footage of the house.
