A reader asks, “Can the rental income from a multi unit property be used at least partially to qualify for the loan? I know in the past that it could as long as the veteran had six months of cash reserve on hand to cover rental vacancies.”
This question comes up frequently; some borrowers want to know if a VA home loan can be used to purchase a multi-unit property (yes) and also want to know if rental income from said property can be used to qualify for the VA mortgage loan (it depends).
Borrowers cannot automatically use projected rental income to qualify for a VA home loan. Can existing rental income be considered “likely to continue”? With proper documentation, yes. Can future income from rentals in the multi-unit property be used to calculate the borrower’s verifiable income? It depends.
The VA does make provisions for projected rental income to be counted in some cases. According to the VA Lender’s Handbook, Chapter 4 under the Income section, you’ll find the following which addresses the rules for rental income from the multi-unit property which is “Securing the VA Loan”–the lender is required to verify:
• cash reserves totaling at least 6 months mortgage payments (principal, interest, taxes, and insurance – PITI), and
• documentation of the applicant’s prior experience managing rental units or other background involving both property maintenance and rental.
The VA rules for these situations also instruct the lender to “Include the prospective rental income in effective income only if:
• evidence indicates the applicant has a reasonable likelihood of success as a landlord, and
• cash reserves totaling at least 6 months mortgage payments are available.”
How does the VA calculate rental income for approval in these cases? According to the rules, “The amount of rental income to include in effective income is based on 75 percent of:
• verified prior rent collected on the units (existing property), or
• the appraiser’s opinion of the property’s fair monthly rental (proposed construction).
Note: A percentage greater than 75 percent may be used if the basis for such percentage is adequately documented.”
There are also VA loan rules for rental income from properties not securing the home loan–we’ll cover those in another blog post. It’s important to note that VA loan rules–especially for situations like these–are subject to change based on legislation, federal law changes, or other factors. Always check with the VA directly before committing to a loan based on information you’ve researched previously to insure no major changes to the rules have occurred in the meantime.