A reader asked us recently,
“I got a loan modification on my house 2 years ago, it is a conventional loan and I am the only one on the loan, my husband job is too far to commute and we have had to rent for the past 4 years.”
“We now are in a better position to buy, my question is if I received a loan modification and I can now rent that house due to job location/income unavailable to that house, will I not be able to use a VA loan to purchase a owner occupied residence for my own use? I never used a VA loan before. Does anyone know?”
VA rules state that a borrower needs to certify that the property being purchased with the VA insured mortgage is to be used as the borrower’s residence. The reader says that’s the intention, so no problem exists there. There’s no specific condition ruling out a VA loan while a borrower owns other property, but the VA loan credit requirements state a borrower must meet debt-to-income ratio requirements.
Does the borrower’s current mortgage affect that debt-to-income ratio? It’s highly likely. Does the borrower’s potential rental income put that ratio back into the borrower’s favor? It all depends on the specific situation. According to VA loan rules, rental income may be considered under the right circumstances. According to Chapter 4 of VA Pamphlet 26-7 the lender will need from the borrower;
- 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.
Here’s some additional information from the same VA pamphlet:
“Analysis: Rental of Other Property Not Securing the VA Loan
Rental income verified as stable and reliable may be included in effective income. If there is little or no prior rental history on the property, make a determination based on review of:
- documentation of the applicant’s prior experience managing rental units or other background involving both property maintenance and rental
- any leases on the property, and
- the strength of the local rental market.”
Finally, the reader seems to be interested in whether having a loan modification on the first property could affect eligibility for the VA home loan. This is an issue best taken up with an individual lender as some banks may have different standards than others. VA loan rules don’t specifically approve or deny loans based on whether a former loan modification is present, but the borrower’s payment history is definitely a factor in applying for a new VA mortgage loan, with or without previous loan modification.
Got questions about VA home loans? Ask us in our comments area.
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