How to Qualify for a VA Loan Using Rental Income

Military Service Members, Veterans, and their families have access to a unique real estate investment opportunity; you can use a low-interest, 0% down payment VA loan to purchase multi-family properties. As long as you live in one of the units as your primary residence, you can buy a property with up to four units. And, as a property owner, you might be able to use your rental income to help you qualify for your VA loan.

Claiming rental income to qualify for a VA loan can get a bit complicated, but if you want to be a real estate investor, it’s worth looking into this option. Not only can you use income from existing real estate investments to purchase a new multi-family property, but you could potentially use the projected rental income from the property you want to buy (your subject property) to finance the purchase.

If you have questions about qualifying for a VA loan using rental income, our mortgage experts here at OVM have the answers. Here’s our VA rental income guideline Q&A.

Can you use rental income to qualify for a VA loan?

Yes, it’s entirely possible to use rental income to qualify for a VA loan. But there are a few conditions.

If you plan to use rental income from one property to qualify for a VA loan on a different property:

• You must have an established record of consistent rent payments (going back at least two years).
• You must also have cash reserves of at least three months. This means that you need to have enough cash on hand to cover the complete mortgage payment (principal, interest, taxes, insurance, as well as any fees like PMI or HOA fees) for at least three months for all properties you own, including the new property you plan to buy.
• Your cash reserve money can’t be a gift or the result of a VA refinance.

If you plan to use projected rental income from the subject property to qualify for a VA loan on that property:

• It would help if you showed your loan officer that you have a reasonable likelihood of success as a landlord. This could be achieved through prior experience as a landlord, professional experience in property management, or by hiring an experienced property manager to handle property operations on your behalf.
• You also need to choose a property that doesn’t have any issues that make it difficult to rent out.
• And it would be best if you had cash reserves of at least six months (principal, interest, taxes, and insurance). These reserves can’t come from a gift or a VA refinance.

How does the VA define rental income?

Rental income is any income received in exchange for leasing real estate to a tenant. In the case of most VA loans, this income comes from renting out a second, third, and/or fourth unit in a multi-family property while you occupy one of the units as your primary residence.

What are the VA loan guidelines for rental income?

VA loan guidelines for rental income depend on whether you plan to claim income from the subject property or from a separate property.

If you plan to claim income from the subject property, the VA allows you to use 75% of the gross rent on the lease to offset your mortgage expenses. However, you cannot add any excess rental income to your other income to qualify for the loan.

If you do not yet have a lease in place (perhaps because the property is newly built or newly rehabbed), you can use up to 75% of a licensed appraiser’s rental estimate to offset your mortgage expenses. If you plan to claim rental income from a separate property to qualify for a VA loan, you can use the amount of the income as calculated on your tax returns (plus any depreciation claimed on your tax returns).

In either case, you need to be able to provide acceptable documentation of your rental income earnings.

What documentation does the VA require to show evidence of my rental income earnings?

VA loan rental income documentation requirements depend on the rental history of the property.

If you are using income from a separate property you already own, you will need to provide income tax returns from the past two years, including Schedule E.

If you are using income from the subject property or from another property you have owned for less than two years, you will need to provide a signed lease. And if you don’t have a signed lease yet, you will need a rental appraisal completed by a licensed appraiser.

While qualifying for a VA loan with rental income is possible, the process can be confusing. Make sure you’re working with a lender who has experience using rental income for VA loans.

As an OVM customer, you get access to a dedicated loan officer who can help you navigate the process. Contact OVM Financial at 757-296-2148 for a free consultation. You can even start your loan application online at ovmfinancial.com/QuickStart.