100 percent VA mortgage for investment property: It’s possible

Can you buy an investment property with no money down?

It is possible to buy a rental property with a 100 percent VA mortgage.

• You buy a two-to-four-unit property and live in one unit
• There is no down payment requirement
• As of January 1, 2020, there’s no limit on how much VA-eligible buyers can borrow with zero down

The zero-down VA mortgage for investment property is a great benefit for those who take advantage of it. You can use rental income from your tenants to cover part or all of your mortgage payment and create wealth.

How does the VA mortgage for investment property work?

You get a VA mortgage for investment property the same way you’d get a VA mortgage for a single-family residence. You’d qualify based on your income and credit rating.

Related: Multi-family homes: Make your house pay for itself

However, if you want to get credit for the potential rental income from the property, the lender needs to verify that you have some landlord, property management or related experience and that you have savings to cover your mortgage payment even if the units go unrented for six months. According to the VA, lenders must verify:

• Cash reserves totaling at least 6 months mortgage payments (principal, interest, taxes, and insurance - PITI), and
• Documentation of the applicant’s prior experience managing rental units or other background involving both property maintenance and rental.

If the VA lender determines that you have enough savings and the “reasonable likelihood of success as a landlord,” it allows you to count current or potential rental income to offset your mortgage payment.

Calculating your qualifying rental income

You don’t get to count all of the rental income when qualifying for a VA home loan. Underwriters look at the current leases on the property and allow 75 percent of the rent from the units you won’t occupy yourself. If the property does not have renters, the lender allows 75 percent of an appraiser’s opinion of the fair rental value for the units.

Related: Tips for landlords (how to set your rent)

VA underwriting guidelines state that, “A percentage greater than 75 percent may be used if the basis for such percentage is adequately documented.”

How it actually works

As of this writing, there is a 3,700 square foot duplex in Las Vegas, NV with a sale price of $315,000. The second unit provides $1,400 a month in rental income.

Assume that you put zero down and finance $315,000 plus a $6,772 VA Funding Fee. Your total monthly payment, including taxes and homeowners insurance, would be about $2,000 with a 4.5 percent mortgage rate.

Related: Guide to becoming a landlord in 2018

If you don’t count the rental income towards your mortgage qualification and have no other debts, you’d need qualifying income of $4,878 a month to get loan approval. That’s because the VA allows up to a 41 percent debt-to-income ratio, which is your monthly debt payment divided by your monthly gross (before tax) income.

If you are able to use the rental income to qualify, you get a different picture:

• The lender would offset the mortgage payment by 75 percent of the rental income
• 75 percent of $1,400 is $1,050
• Subtracting $1,050 from your $2,000 mortgage payment gets you a payment of $950

With no additional debts, your income required to qualify drops to $2,317 a month.

Required reserves

To use the rental income or potential rental income for qualifying, you’ll have to prove that after closing, you’ll have savings equal to six months of your total homeownership costs — principal, interest, property taxes and homeowners insurance.

For the example above, that’s six times $2,000, or $12,000.

VA mortgage closing costs

To boost your reserves after closing, you may have to minimize your closing costs. There are several ways to do this.

You can have the seller pay your closing costs instead of asking for a lower purchase price. For example, instead of offering 97 percent of the asking price, make a full-priced offer and ask for a 3 percent credit toward your closing costs.

Related: getting sellers to pay your closing costs

You can also have your mortgage lender cover these costs in exchange for charging a higher mortgage rate. In general, every point (1 percent) credit towards closing costs increases your interest rate by .125 to .25 percent, depending on the lender.

Finally, instead of paying the VA funding fee, which insures your loan, you can wrap it into the loan amount. In the example above, the funding fee was wrapped into the loan. This does increase your payment, but allowing your rental income to offset your payment makes qualifying easier.