VA loans are a valuable tool for many veterans and active-duty service members looking to buy a home. However, many people are unaware that VA loans can also be used for a second home purchase. In this blog post, we will explore the requirements for using a VA loan for a second home and answer frequently asked questions about this topic. If you’re a veteran or active-duty service member considering buying a second home, keep reading to learn more.
Questions we’ll address in this post:
- Can you use a VA loan for a second home?
- Can I use a VA loan to buy a vacation home?
- Can I use a VA loan for an investment property?
- How does the VA bonus entitlement work?
- What is the difference between full vs. remaining entitlement?
- What is an example of a bonus entitlement?
- How can one best understand loan limits?
- How many times can I use a VA loan?
- How can I restore my eligibility after I sell my home?
- What do I need to know if someone assumes my VA loan?
Now, let’s dive into the details and answer these questions individually.
Can You Use a VA Loan for a Second Home?
If you’re a veteran or active-duty service member looking to buy a second home, you may wonder if you can use a VA loan for a second home. The answer is yes, but there are some conditions you must meet:
To use a VA loan for a second home purchase, you must first satisfy your initial VA loan requirements, which means you must have served at least 90 consecutive days on active duty during wartime, or 181 days during peacetime, or served for at least six years in the National Guard or Reserves. You must also have a certificate of eligibility (COE) from the VA.
In addition to these requirements, you must meet other conditions to use a VA loan for a second home. The property must be in the United States and be used as a residence for at least a portion of the year. The VA does not specify that the property must be a primary residence, so it can be a vacation home or a rental property if you occupy it for some portion of the year.
Remember that the VA loan amount may be limited for a second home purchase, and you may need to make a down payment to cover the difference between the loan amount and the purchase price. However, a VA loan for a second home can still be an excellent option for many veterans and active-duty service members.
The following section will explore whether you can use a VA loan for vacation homes or investment properties.
VA Loans for Vacation Homes and Investment Properties
While VA loans are primarily intended for purchasing a primary residence, there are some circumstances in which they can be used to buy other types of properties, such as vacation homes or investment properties. However, there are some additional requirements and limitations to keep in mind.
To use a VA loan for a vacation home, the property must still meet the exact occupancy requirements as a second home. You must use the property for at least some portion of the year as a personal residence. The property must be in the United States and be a single-unit property.
Using a VA loan for an investment property is more complicated. The VA does not allow VA loans for purely investment purposes, meaning the property must be primarily used as a personal residence. Additionally, you can only use a VA loan to purchase a property with up to four units, and you cannot use a VA loan to purchase a property with more than one acre of land. If the property has more than one unit, you must occupy one of the units as your primary residence.
While using a VA loan for a vacation home or investment property can be an attractive option for some veterans and active-duty service members, there are some limitations and potential drawbacks to keep in mind. The loan amount may be limited, and you may need to make a down payment to cover the difference between the loan amount and the purchase price. Additionally, if you use the property as a rental, you will be subject to the VA’s rental income requirements.
In the next section, we’ll explore how the VA bonus entitlement works and how it can affect your ability to use a VA loan for a second home purchase.
Understanding VA Bonus Entitlement and Loan Limits
When you use a VA loan to purchase a home, you are given a certain amount of entitlement – the maximum amount the VA will guarantee on your loan. If you have used your VA loan entitlement before, you may still be able to use a VA loan for a second home purchase using your remaining entitlement or bonus entitlement.
The full entitlement is the amount of entitlement the VA guarantees for every eligible veteran. As of December 2022, eligible veterans, service members, and survivors with full entitlement no longer have limits on loans over $144,000, meaning no down payment is necessary. The VA will guarantee your lender that if you default on a loan over $144,000, the VA will guarantee up to 25% of the loan amount for a borrower with full entitlement. One qualifies for full entitlement if they meet at least one of the following requirements:
- You’ve never used your home loan benefit, or
- You’ve paid a previous VA loan in full and sold the property (in this case, you’d have your full entitlement restored), or
- You’ve used your home loan benefit but had a foreclosure or compromise claim (also called a short sale) and repaid us in full.
You may have the remaining entitlement if you have used your VA loan entitlement before, meaning that you can use your remaining entitlement to purchase a second home as long as the total amount of the VA loan is within the remaining entitlement amount.
You may also have bonus entitlement, an additional entitlement that the VA provides to borrowers who meet specific requirements, such as purchasing a home in a high-cost area. Bonus entitlement can sometimes be used to purchase a second home, but the loan amount cannot exceed the bonus entitlement.
For example, let’s say you used your full entitlement to purchase your first home, which you later sold. You now have a remaining entitlement of $68,250. If you want to use a VA loan to purchase a second home for $300,000, you could use your remaining entitlement of $68,250 and your bonus entitlement of $89,062 to cover the guarantee on loan.
It’s important to note that VA loan limits vary by location and are based on the conforming loan limit set by Fannie Mae and Freddie Mac. In most areas, the VA loan limit for 2023 is $726,200. However, in high-cost areas, the loan limit can be much higher.
If you use a VA loan to purchase a second home, the loan amount may be limited by the remaining entitlement, the bonus entitlement, or the loan limit for your area. Sometimes, you may need to make a down payment to cover the difference between the loan amount and the purchase price.
In the next section, we’ll explore how many times you can use a VA loan and how to restore your eligibility after selling your home.
Using VA Loans Multiple Times and Restoring Eligibility
If you’re a veteran or active-duty service member, you may wonder how many times you can use a VA loan to purchase a home. You can use a VA loan as often as you want if you meet the eligibility requirements and have remaining entitlement.
To restore your eligibility for a VA loan after selling your home or paying off a VA loan, you must apply for restoration of entitlement. To do this, you will need to submit a completed VA Form 26-1880, along with proof of the sale of your home or the payoff of your VA loan. You will also need to provide proof of your current military status, such as a statement of service or discharge papers.
Restoring eligibility can take some time, so starting the process early is essential if you intend to use a VA loan for a second home purchase. Additionally, keep in mind that you will need to satisfy the exact requirements as you did for your initial VA loan, including having served the minimum length of time and obtaining a certificate of eligibility.
It’s important to note that if you default on a VA loan, you may lose your entitlement and be unable to restore it. Additionally, if you have a VA loan in default, you may only be able to use your remaining entitlement for a second home purchase once the default is resolved.
What to Know if Someone Assumes Your VA Loan
If you have a VA loan and you’re considering selling your home, you may have the option to allow the buyer to assume your VA loan. Here’s what you need to know about VA loan assumptions:
A loan assumption is when a buyer takes over the payments on an existing mortgage instead of obtaining a new mortgage to purchase the property. In the case of a VA loan, the buyer must also be a veteran or active-duty service member and meet specific eligibility requirements.
To qualify for a VA loan assumption, the buyer must have a good credit score and sufficient income to make the payments on the loan. The buyer must also obtain a certificate of eligibility from the VA and meet other underwriting requirements.
One advantage of a VA loan assumption is that it can save the buyer money on closing costs and may provide a lower interest rate than a new mortgage. However, the buyer will be assuming the remaining term and balance of the original loan, which may only be ideal if the buyer plans to keep the property for a short time. Additionally, the seller will still be liable for the loan if the buyer defaults.
Before agreeing to a loan assumption, it’s essential to consider the pros and cons carefully and to work with a qualified mortgage professional who can help you make an informed decision.
Apply for a VA Loan Today at Option Funding Inc.
In this blog post, we’ve explored the use of VA loans for second homes, vacation homes, and investment properties and the requirements and limitations of each. We’ve also discussed how the VA bonus entitlement and loan limits work, how to restore eligibility for a VA loan, and what to consider if someone assumes your VA loan.
If you’re a veteran or active-duty service member considering purchasing a second home, a VA loan can be a valuable tool to help you achieve your goals. Contact me, Ahmad Azizi of Option Funding Inc., if you have any further questions or are ready to apply for a VA loan for a second home purchase.