VA Home Loans, Rental Income and Occupancy Rules: A Reader Question
A reader asks, “Can a borrower purchase a new home using his current VA benefit and rent out his existing home (which VA benefit was not used to purchase) ? Can you exclude the previous mortgage payment with rental agreement , deposit check & 1st months rent?”
VA loan rules require occupancy for the property being purchased with the VA mortgage. If the borrower intends to live in the property being purchased with the VA mortgage, this may be possible. The mortgage payment could be included in the borrower’s debt to income ratio as the debt is a factor in the ability to repay the loan, but the projected rental income MIGHT be permitted depending on circumstances, as defined by VA loan rules printed below.
VA Pamphlet 26-7 has some rules about this–Chapter Four states clearly in its instructions to the lender for income verification and analysis:
“Verification: Rental of the Property Applicant Occupied Prior to the New Loan–Obtain a copy of the rental agreement on the property, if any.
Analysis: Rental of the Property Applicant Occupied Prior to the New Loan–Use the prospective rental income only to offset the mortgage payment on the rental property and only if there is no indication that the property will be difficult to rent. This rental income may not be included in effective income.
Obtain a working knowledge of the local rental market. If there is no lease on the property, but the local rental market is very strong, the lender may still consider the prospective rental income for offset purposes.
Verification: Rental of Other Property Not Securing the VA Loan–Obtain the following:
• Documentation of cash reserves totaling at least 3 months mortgage payments (principal, interest, taxes, and insurance – PITI), and
• Individual income tax returns, signed and dated, plus all applicable schedules for the previous 2 years, which show rental income generated by the property.”
As you can see, these issues are handled on a case-by-case basis and should be discussed at length with the lender as every circumstance is different. What applies in one VA loan transaction like this may not necessarily translate to another sale, another financial institution, etc.
Do you have questions about VA home loans or refinance loans? Ask us in the comments section.