Tips & Special Topics
Unacceptable Uses for VA Loans
Added October 19, 2010
Many VA-eligible borrowers understand that veterans’ mortgages can be used for the following purposes:
• Single family resident purchase
• VA-approved townhouse purchase
• VA-approved condominium purchase
• New home construction
• Home improvements, repairs or alterations
• Cash-out refinance for debt consolidation
• Streamline refinance
• Cash-out refinance for “green” upgrades
What some VA borrowers may not know is that just as there are acceptable uses, there are also unacceptable uses for VA loans. The VA Home Loan Guaranty Program may not be used to purchase:
• Unimproved land with no specific date for construction
• Investment property
• Combined business/residential property with less than 75 percent dwelling space
• Multi-family unit housing that is not owner-occupied
Since the VA home loan program is designed to help veterans and active duty military members obtain mortgages for homes in which they intend to live, most of the ineligible uses described are restricted because they typically don’t fall under the owner-occupied category.
For instance, simply purchasing unimproved land does not show intent to occupy. Only land purchases with plans to occupy are acceptable. Land purchased for the purpose of a mobile home placement is a good example of an acceptable use. And, land purchased for new construction may also be approved. Unless a prospective VA borrower intends to place a home on the lot, VA loans may not be used to purchase land. Its important to know that even though the VA home loan program allows financing for new construction not all VA lenders offer this type of loan.
Another restricted use for VA mortgages is the purchase of investment property. VA guidelines don’t allow a borrower to purchase a home with a VA loan with the intent to rent it out. VA loans require the borrower to certify that he or she intends to occupy the property. Typically, a VA borrower would need to sell a property financed with a VA loan and restore entitlement before he or she can finance another home using the VA loan program. That said, there is a one-time-only exception where a VA borrower can pay off his or her loan, restore entitlement and continue to own the home while purchasing another home using the VA loan program.
Related to the investment restriction for VA loan use is the purchase of multi-family dwellings. A VA borrower may purchase a multi-family dwelling (up to four units) provided he or she occupies one unit as his or her primary residence. The other three units may be rented out for income. Again, not all VA approved lenders offer this type of loan for multi-family use.
Just as there are restrictions on income properties financed with VA loans, there are also strict guidelines for properties intended for business use. A VA borrower may purchase a residential property and work from home as long as the space dedicated for business does not exceed 25 percent of the total square footage. In other words, 75 percent or more of the property must be designated as living space.
Lenders may have additional guidelines for determining which VA home loan they are willing to offer. For more information about the unacceptable uses of VA loans, contact a VA mortgage professional.
