In our last article, we covered the basic elements of a VA loan and covered some important but basic points. here we’ll be going more in-depth on one of those basic points, which is eligible loan purposes. In other words, what kind of properties are allowed to be purchased with a VA loan and what purposes are those properties allowed to serve if they are to be financed with a VA loan? There are fairly strict rules on what properties can be purchased and why; this is in order to keep the VA loan program from being used contrary to its purpose. The purpose of the VA loan program is to enable veterans to obtain suitable housing on terms more favorable than they could otherwise receive.
The VA will only guarantee loans to eligible veterans for specific purposes. The first one is the most obvious: to purchase or construct a residence. This includes a condo that is going to be both owned and occupied by the borrowing veteran. The loan can also include the purchase of the land that the property is on, and can finance the construction of a home on land that the veteran already owns. The property cannot have more than four family units and one business unit. The exception to this rule is in the event of a joint VA-loan, if two VA-eligible borrowers apply for a loan together they may be allowed to purchase a larger property.
A VA loan can also be used to refinance an existing VA loan or a conventional loan in order to obtain a lower interest rate. A VA loan can be used to refinance any existing mortgage loan or any other indebtedness that is secured by a lien on the home that the veteran is occupying as their primary residence. Borrowers can also use a VA loan to finance repairs, alterations, or improvements to the home that they already own and occupy, and can even purchase a new home and get money for improvements at the same time. These improvements can include (but are certainly not limited to) energy-efficient upgrades such as a solar heating system, cooling system, or other energy-efficient improvements.
A single-family residential unit in a condo project can be purchased with a VA loan as long as the condo project is on the VA’s approved list. Many condos include agreements and contracts that conflict or don’t measure up to VA’s standards. If a condo project is not on the approved list, a borrower can submit it for approval. The VA will also approve loans to purchase a farm residence, as long as the veteran intends to occupy it. In addition, if the loan is also including the purchase of the farmland, the farmland is appraised at its residential value only.
There are plenty of purchases that are specifically outlined as ineligible. For example, land cannot be purchased with the intent of improving it or building upon it at some future date; the borrower must be intending to build and occupy a house on the land immediately after purchase. The VA will not approve the purchase or construction of a building for investment purposes, or the purchase or construction of a combined residential and business property unless it meets the following conditions:
- the property is primarily for residential purposes
- there is not more than one business unit
- the nonresidential area does not exceed 25% of the total floor area.
The VA will also not approve the purchase of more than one separate residential unit or lot unless the veteran will occupy one unit and there is evidence of the following:
- the residential units are unavailable separately
- the residential units have a common owner
- the residential units have been treated as one unit in the past
- the residential units are assessed as one unit
- partition is not practical, as when one unit serves the others in some respect; for example, common approaches or driveways
Generally speaking, the borrower is not able to receive any cash at closing a VA loan. There are two exceptions to this, however; for IRRRL’s, it can be possible to receive cash at closing, and for cash-out refinancing loans, as the name implies, a borrower can get cash-out, usually to improve the home or consolidate debt.