VA loans have very flexible guidelines, but one thing they are not forgiving about is the owner occupancy rule. The VA guarantees the loans in order to give veterans access to a flexible loan program. With 100% financing and lenient credit score and debt ratio requirements, veterans have easy access to the funds they need to buy a home. But what happens in the future if a veteran wants to move? Can they rent out the property?
A quick glance at the VA guidelines tells you that ‘no you cannot rent out your property.’ You agreed to live in it as your primary residence. Moving out and renting it to someone else violates this agreement. The good news, however, is that the VA does have a few exceptions to this rule.
The VA understands that it’s impossible to predict the future. No one knows where they will be working down the road, especially if you are still active in the military. What happens if the military or your non-military related job relocates you somewhere that isn’t convenient to commute to from your primary residence?
You have a few options:
- Sell the home and reinstate your VA entitlement – When you pay off the original VA loan, you can petition the VA for reinstatement of your benefits. This would allow you to buy another home using your VA financing with no down payment.
- Keep the home and the VA loan – If you keep the home and the VA loan, you cannot reinstate the use portion of your VA entitlement. But, as long as you can prove that you have to move due to an inconvenient commute, the VA may allow it. You then have the option to rent the house out and use the money to help cover the mortgage payment
The idea behind the ability to rent out your original home bought with VA financing, is that you will come back to the home at some point. This isn’t required, but it’s the premise behind the program.
The VA does allow you to move out of your original home and use your VA benefits on another home for one more reason. In this case, you have to prove that you outgrew the home. For example, let’s say you bought a 2-bedroom home with your VA benefits, but now you have 3 children. You no longer have room in the home to live. The VA will allow you to use your benefits on another home that does fit your family.
How to Buy a Home With Remaining Entitlement
If you leave some of your entitlement in the original home you purchased, you no longer have the maximum benefit at your disposal. Originally, the VA allowed you to buy a home for as much as $424,100. The VA would then guarantee 25% of that amount, or $106,025. If you still own a home that you bought with VA financing, though, you lose that portion of your entitlement.
Here’s an example:
You buy a home for $200,000 with VA financing. This means you used up $50,000 of your entitlement. If a few years down the road you are relocated, but you want to keep the home, you can buy another home, but the VA will only guarantee $56,025, which is a $224,100 loan amount.
If you want to buy a home that is worth more than $224,100, you will have to make a down payment equal to 25% of the difference. Let’s say for this example that you wanted to buy a $300,000 home. You would then have to put down $18,975 on the home.
How to Rent out the Home
Luckily, the VA allows you to rent out the home that you originally owned. They do not say that you have to rent it out, but it can help offset the cost of the mortgage. Remember, when you take out another VA loan, you have two mortgages to cover. Before you take on the additional VA loan, make sure you can comfortably afford both payments.
The VA will require that you have an ample amount of disposable income after paying both loans. This is their main focus rather than a focus on the debt ratio like most other loans. The VA assumes that if you have enough disposable income based on the cost of living in your area and your family size that you can comfortably afford the loan.
If you want to rent out your current property with a VA loan, make sure you petition the VA for an exception. At the very least, you should talk to your lender about the situation to see what they think you should do. In many cases, you can use your additional VA entitlement to buy another home, allowing you to keep your original home as a rental home.