Military members frequently become landlords. Some transfer duty stations and decide to rent out their homes. Others take active measures to find, buy, and lease investment properties. Regardless of how you become one, successful landlords need to understand how to measure a property’s cash flows. As such, we’ll use this article to explain rental property cash-flow analysis for military landlords.

Specifically, we’ll discuss the following:

• An Overview of Rental Property Cash-flow Analysis
• Cash-flow Analysis Step 1: Project Monthly Rents
• Cash-flow Analysis Step 2: Determine Monthly Debt Service
• Cash-flow Analysis Step 3: Project Monthly Operating Expenses
• Cash-flow Analysis Step 4: Account for Reserve Transfers
• Cash-flow Analysis Step 5: Do the Math and Make a Decision
• Final Thoughts

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An Overview of Rental Property Cash-flow Analysis

As a future military landlord, it’s easy to become overwhelmed by seemingly complicated real estate jargon. But, a cash-flow analysis shouldn’t overwhelm you. Simply put, it’s a way to make sure that the amount of cash you receive from a rental property every month exceeds the amount you spend. Do your monthly rents cover all the cash you need to spend on the property?

Of note, cash-flow analysis differs from tax analysis for two main reasons. First, when you pay your mortgage, a portion goes to interest and a portion to loan principal. The loan principal portion is not tax deductible, but you still need to spend that cash every month. Next, depreciation reduces your taxable income, but it’s a cash-less expense. So, while depreciation affects your taxes, it doesn’t directly affect your monthly cash flow. (NOTE: Depreciation indirectly affects cash flow when considering the associated annual tax savings, but a basic cash-flow analysis does not need to go into this level detail).

Cash-flow analysis proves particularly important for military landlords. Many of these individuals don’t choose a rental property. Instead, they buy a home, live in it as their primary residence, then decide to rent it out when they PCS. However, a good home does not equal a good rental property. Enjoying living somewhere does not mean that the local rental market conditions will support converting a home into rental. As a result, these potential military landlords must understand cash-flow analysis to make the decision: sell your home or rent it out when you PCS?

In the remaining sections, we’ll outline the steps to complete a basic cash-flow analysis for a rental property. Once you understand the concept, you can create a simple Excel spreadsheet to conduct A) a cash-flow analysis for a single home; or B) comparative cash-flow analyses for multiple potential rental property purchases.

Cash-flow Analysis Step 1: Project Monthly Rents

Begin your cash-flow analysis (and any budgeting process) with the top-line results: monthly rents. With the massive amount of real estate information available online, you can estimate future rents fairly easily.

Using Zillow, Redfin, or another online rental platform, set up a search for available rentals in your neighborhood. Make sure that the property parameters (e.g. bedrooms, bathrooms, square footage, garage, etc.) are as similar as possible to your target property. Once you have a few comparable properties (three minimum, but more is better), add them up and divide them to get the average asking rent in your area.

But, you won’t use this average as your projected rent. With cash-flow analysis, it’s always better to err on the side of caution. As such, we recommend using a 10% discount. If the average asking rents for similar homes in your neighborhood is $2,000, deduct $200 and use $1,800 for your analysis. If the numbers work with this conservative estimate, anything above that 10% discount is just a bonus.

Enter this number in the top line of your spreadsheet.

Cash-flow Analysis Step 2: Determine Monthly Debt Service

Next, you need to determine your largest single monthly cash outflow – debt service. If you already own your home, you know the size of your monthly mortgage payments. If you’re considering buying a rental property, you’ll need to make some assumptions and use a loan calculator. In particular, you’ll need to assume 1) interest rate, and 2) closing costs (which, if rolled into your loan, will affect monthly payments).

Combining these assumptions with the loan amount (based on the purchase price and down payment) and loan term (e.g. 15-year, 30-year, etc.) allows an online loan calculator to solve for the monthly payments. If you prefer a more hands-on approach, you can also solve for this number with Excel’s PMT function (just make sure to divide it by 12 for the monthly amount).

Enter this payment amount immediately beneath the projected monthly rent on your spreadsheet.

Cash-flow Analysis Step 3: Project Monthly Operating Expenses

After confirming your mortgage payment, you need to project monthly operating expenses. Some of these you’ll know, and some you’ll need to estimate. While not an all-inclusive list, here are the most common rental property operating expenses:

• Insurance: An agent can provide you a quote for an accurate estimate.
• Property taxes: In most municipalities, you can find property tax records online. Find the current tax-assessed value of your property, multiply it by the local tax rate, and divide that by 12 for the monthly amount.

NOTE: With most residential mortgages, insurance and property taxes are paid from an escrow account and will be included in your monthly mortgage payment. This doesn’t change the fact that you need to account for these cash outflows in your analysis.

• Property management: If you choose to hire a property management company, ask for their fee structure up front. Most companies charge a percentage of monthly collected rent (8% to 12% is typical).
• Homeowner Association Fees (HOA): You can find this information on an online property listing. If working with a real estate agent to purchase a rental property, you can see this info in the MLS listing for the property.
• Landscaping and Utilities: For most single-family rental properties, landlords “pass through” these expenses directly to the tenant, so they shouldn’t factor into your cash-flow analysis. However, if you offer to pay for any of these items, you’ll need to account for the expenses in your analysis.

Enter all of the above items on your Excel spreadsheet beneath debt service. While you can lump operating expenses into a single cash outflow, a line-by-line accounting provides far more fidelity and analytical value.

Cash-flow Analysis Step 4: Account for Reserve Transfers

You likely noticed that we didn’t mention any maintenance payments in the operating expenses section. Due to the sporadic nature of these expenses, we instead recommend rolling maintenance into a general monthly reserve transfer. Every month, you should transfer funds from your rent bank account into a reserve account to plan for the following issues:

• Maintenance expenses (e.g. broken garbage disposal, chipped paint, etc.)
• Capital improvements (e.g. new roof, replaced HVAC system, etc.)
• Vacancy (periods when you don’t have a tenant in the property)

These situations can’t necessarily be planned for on a monthly basis. But, they will affect your cash flows at some point in time. To smooth your cash flows out, transfer a flat reserve amount every month. That way, whenever one of the above scenarios arise, you simply transfer funds out of your reserve account without an impact on current cash flows (or, worse, needing to put a repair on your credit card).

You can think of these reserve transfers as your “peace of mind” transfers. Plenty of rules of thumb exist for reserve transfer size, but we recommend 10% of rents. For instance, if you use the above $1,800 rent for planning purposes, account for a $180 reserve transfer in your cash-flow analysis. Then, when you actually lease your property, make sure that you set up the associated automatic bank transfer.

Whatever you decide on for the reserve amount, add it to your spreadsheet beneath the operating expenses section.

Cash-flow Analysis Step 5: Do the Math and Make a Decision

This is the easy part. Create a bottom-line formula on your spreadsheet that subtracts the sum of all cash outflows from the projected monthly rent. At a minimum, the projected rents should cover all projected cash outflows, including the reserve transfers. If not, the property will likely not make a great rental, as it’ll require you to continue dumping more and more cash into it to cover these monthly shortfalls.

Certain investors also require a level of cash flow above monthly cash outflows. In other words, after making all cash payments in a given month, these investors want some cash remaining. If you have a minimum cash-flow requirement, you can also add this to your spreadsheet.

For instance, some investors require 10% of rents as a minimum cash flow (e.g. $180 remaining based on the above $1,800 rent). Simply add another formula dividing the remaining cash in the final spreadsheet cell by the monthly rent, multiply it by 100, and you’ll have your percentage-of-rent cash return. If you want 10% but the spreadsheet kicks out 5%, you know the property fails to meet your investment criteria.

Final Thoughts

For military landlords, it’s important to understand that not all homes make great rentals. By using the above cash-flow analysis techniques, you evaluate whether or not a property will make sense as a rental. Consequently, before deciding to convert your home into a rental property after a PCS, run the above cash-flow numbers.

Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.

The VA loan provides eligible veterans and active troops an incredible home buying option. But, VA eligibility does not equal lender approval. If you don’t meet the lender’s income, credit score, and other requirements, you won’t qualify. This leads many borrowers to ask about applying for a loan with a co-borrower. As such, we’ll use this article to outline VA loan co-borrowing options.

Specifically, we’ll discuss the following:

• VA Loan Overview
• Loan Co-Signer vs Co-Borrower
• VA Loan Co-Borrowing Options
• Avoiding Co-Borrowing Requirements
• Final Thoughts

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VA Loan Overview

The VA loan has its origins in the Servicemen’s Readjustment Act of 1944 – more commonly known as the GI Bill. Among other items, this legislation created an affordable mortgage option for veterans and active service members. In its current form, the VA loan offers the following outstanding benefits:

• No down payment required
• No private mortgage insurance (PMI) required
• Low interest rates
• Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)

But, it’s important to understand that the Department of Veterans Affairs doesn’t actually lend money. Instead, it guarantees a portion of every VA loan issued by a variety of VA-approved lenders (banks, credit unions, mortgage companies, etc.).

This system significantly reduces risk for these lenders. If a borrower defaults on a loan, the VA will reimburse the lender a portion of the outstanding balance. But, this arrangement also means that borrowers need to meet the requirements of two organizations: the VA and the individual lender.

The VA’s requirements largely revolve around the borrower’s military background and the condition of the property. Lenders, on the other hand, concern themselves primarily with the borrower’s financial situation. That is, can you continue to make the monthly payments for a VA loan? If lenders believe you lack the financial strength (e.g. income, credit score, etc.) to reliably make payments, they likely will not approve your VA loan.

Loan Co-Signer vs Co-Borrower

When veterans do not qualify for a VA loan on their own, they likely A) do not have adequate income, B) have too much debt, C) have too low a credit score, or D) some combination of all of these. Fortunately, an alternative exists when someone cannot independently qualify for a loan: he or she can apply for financing with someone else.

In theory, another person’s strong financial situation offsets your weaker one, allowing the two of you to qualify for a loan together. But, borrowers have two ways to structure such an arrangement, and it’s important to understand the difference:

• Co-signing on a loan: A co-signer assumes responsibility for a loan if the borrower defaults on it. This personal guarantee reduces risks for lenders, which is why a co-signer can get a loan application approved. But, co-signers do not own any of the property purchased with the loan.
• Co-borrowing on a loan: Co-borrowers assume responsibility for loan payments from the beginning – not just if the other borrower defaults. As such, these individuals can also boost the overall financial situation for a borrower, leading to loan approval. But, unlike co-signers, co-borrowers actually own a portion of the property purchased with the loan.

As these differences illustrate, co-borrowing on a VA loan involves purchasing a home with someone else – ideally someone with a better financial position than your own. Broadly speaking, three of these co-borrowing options exist, which we’ll outline in the next section.

VA Loan Co-Borrowing Options

Co-Borrowing Option 1: VA-Eligible Borrower and a Spouse

Typically, this represents the simplest option for VA loan co-borrowing. With some unrelated co-borrowers, you will still need to provide a down payment, negating the primary benefit to the VA loan. But, when your spouse serves as your co-borrower, his or her financial picture can assist your loan application without triggering the need for a down payment.

Co-Borrowing Option 2: VA-Eligible Borrower and Unmarried Partners

Conversely, having an unmarried partner (e.g. fiancé/ee, friend, sibling, etc.) as a co-borrower can trigger a down payment requirement. The VA will only guarantee the eligible borrower’s portion of a home loan. Consequently, a lender will only receive half the level of protection if you and your co-borrower evenly split a purchase. Due to this reduced protection, the lender will require a down payment for the co-borrower’s portion of the purchase.

But, if this co-borrower makes the difference between qualifying and not-qualifying for a loan, this partial down payment requirement may make sense.

Co-Borrowing Option 3: Two VA-Eligible Borrowers (Married or Unmarried)

The final co-borrowing scenario involves two borrowers, both of whom have VA loan eligibility (e.g. two veterans, two active service members, eligible reservists, etc.). In this scenario, whether or not these borrowers are married does not matter, as they both have eligibility.

You can take a couple different approaches to using the two borrowers’ respective VA loan entitlements. Option 1: use all of one borrower’s entitlement and save the other’s entitlement for a future home purchase. Option 2: evenly split the entitlement of both borrowers on the first purchase, leaving equal remaining amounts of entitlement for future purchases.

Avoiding Co-Borrowing Requirements

At the end of the day, people need co-borrowers due to shortcomings in their own financial situation. Accordingly, if you improve your financial situation, you can avoid the need – and potential drawbacks – to using a co-borrower for a VA loan. While certainly not an all-inclusive list, here are some ways to improve your financial situation to help qualify for a VA loan:

Purchase a Home on Active Duty

If you use the VA loan while still on active duty, you can use your BAH towards lender income requirements. Once you retire or separate, you lose these monthly, tax-free payments, frequently making loan qualification far more difficult.

Pay Off Debt to Reduce Your DTI

Debt-to-income ratio, or DTI, serves as one of the primary metrics lenders use to approve or deny loans. Conceptually, it represents the amount of every dollar of income used to pay your debt. Mathematically, DTI equals your total monthly debt payments (including your future mortgage) divided by your total gross (pre-tax) monthly income. If you pay off credit card debt, auto loans, or student loans, you can reduce the amount of your monthly debt payments, thus reducing your overall DTI.

Improve Your Credit Score

Credit scores serve as another major metric lenders use when assessing a borrower’s financial situation. If you improve your credit score, you gain two major benefits. First, you’ll be more likely to qualify for a VA loan. Second, the higher your credit score, the lower your interest rate, potentially saving you tens of thousands of dollars over the life of a mortgage. Plenty of techniques exist to improve your credit score, and paying off debt – as recommended above – absolutely helps. If concerned about mistakes on your credit report, you can appeal with the major reporting agencies. Alternatively, you can hire a credit repair company to help rectify the issues.

Final Thoughts

Even with VA loan eligibility, you may not qualify for a loan. Veteran and active duty borrowers still must meet strict lender requirements to secure a VA loan. If you fail to meet these lender requirements due to financial issues, using a co-borrower can help. Bringing on a co-borrower can potentially improve your overall financial picture enough that the two of you together qualify for a VA loan.

Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.

The VA home loan benefit is one of the most popular and important of those offered to military members in exchange for serving.

Once a soldier, sailor, airman, or Marine has served enough time on active duty to qualify for the VA loan program, they may apply for VA loan eligibility and start working with a participating lender to buy or build a home with no money down, zero mortgage insurance, and no penalty for early payoff of the VA mortgage.

But not everyone wants to buy a home all by themselves. For any number of reasons some want to know if a veteran home loan can have a cosigner. This is a slightly complicated issue but there are clear answers.

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What Is A Veteran Home Loan?

Technically speaking, a “veteran home loan” could be interpreted as any mortgage that is offered to a veteran. That would technically include FHA, USDA, and conventional mortgages. Some home loans may be tailored to veterans by the lender, others may be government programs that have in the past offered favorable terms to applicants with veteran status.

For the purposes of this discussion, a “veteran loan” refers specifically and ONLY to loans guaranteed under the VA home loan program. A VA mortgage can be used to buy, refinance, and/or renovate a property using this no money down government-backed mortgage.

VA loans are only made to military members with VA loan entitlement which must be earned through a minimum amount of qualifying military service. Certain surviving spouses of military members who have died as a result of military service are also allowed to apply.

Getting A Cosigner On A VA Mortgage: The Basics

There is a very important factor to consider when dealing with questions like these–two sets of rules. There are the rules of the VA mortgage loan program itself, which are found in the VA Lender’s Handbook.

Then there are the standards of the financial institution issuing the mortgage or refinance loan. VA loan rules and lender requirements both are subject to state law. VA loan rules never override state or federal law.

VA loan rules state clearly that it is permissible to have a co-signer on a VA mortgage. The basic question is answered, but lender standards will also have a say. Your participating lender may not allow a co-signer depending on circumstances. Or the lender will permit one ONLY if circumstances meet certain criteria.

Another Important Area

The VA Lender’s Handbook states clearly that all applicants for a VA mortgage must financially qualify. You cannot bring on a cosigner to offset your own credit issues.

If you have low credit scores or have missed payments in the last 12 months leading up to your loan application, bringing on a cosigner will not affect your lender’s decision to approve or deny the loan on the basis of your credit information.

A cosigner can help in the income department–more income is better and two borrowers have a greater potential to stay solvent on the mortgage.

But two borrowers can never cancel each other out where credit issues are concerned. Some want a cosigner for just this reason, but it’s generally not possible with a government-backed mortgage like a VA home loan or VA refinance.

Cosigners: What Is Typically Allowed By A Participating VA Lender

Two or more veterans may apply for a VA mortgage together as cosigners. In such cases, the VA will calculate the borrower’s entitlement (those who have never purchased before will have 100% of their VA loan entitlement to use) and subtract only the amount of entitlement proportional to each borrower’s share of the financial burden of the loan.

A veteran and spouse–even a spouse who is a civilian–may apply for a VA home loan together but technically speaking this is not considered cosigning.

The VA loan program views a legally married couple buying a home as a different thing entirely than two military members or veterans applying for a loan together or a civilian who is not a spouse applying with a veteran.

Cosigners: Non-Veterans And Those Without VA Loan Entitlement

If you want to have a cosigner for a VA mortgage, there are two things you need to know. The first is that the Department of Veterans Affairs permits a cosigner in this context but the VA does NOT guarantee the non-veteran/non-military member’s portion of the loan.

Only the veteran’s portion of the loan may be guaranteed by the VA. In other words, a civilian or someone with no VA mortgage loan entitlement cannot have their half or portion of the loan as a VA mortgage.

The second thing you need to know is that your participating lender may or may not permit a cosigner in this context.

When talking to your loan officer about the option to apply for a home loan with a non-VA borrower, be sure to use the term “joint loan” or “joint VA loan”. Experienced VA lenders know this term and will immediately understand what you are trying to do and advise accordingly.

One critical issue associated with a non-veteran, non-spouse civilian applicant? The loans offered as joint VA mortgages will require a down payment from the non-veteran applicant. VA zero-down options are only for the veteran/borrower with VA loan entitlement.

Non-Occupying Co-Borrowers

Some lenders may require a transaction between a civilian who is not a spouse and a veteran as cosigners or co-borrowers to be processed as a “non-occupying co-borrower”. That designation may result in changes in the loan terms you are offered. Be sure to ask if this is a possible factor as it may affect your out of pocket costs of the mortgage or refinance loan.

Pitfalls Of Using A Cosigner

If you plan to apply for a VA mortgage with a cosigner, it’s important to have your cosigner review their credit report and FICO scores and look for anything in the cosigners credit picture that could interfere with the loan.

One of the biggest stumbling blocks in this area for some VA loan applicants? Situations where the cosigner has already cosigned on someone else’s debt, situations where an old cosigner agreement went bad and the cosigner had financial liabilities as a result.

Other issues can include debt-to-income ratios that are too high, situations where the cosigner has had late or missed payments on any financial obligation but ESPECIALLY housing expenses.

You will need to know the complete financial picture of your cosigner for best results–anything less could result in surprises along the way and sometimes those surprises come at the cost of trust or friendship depending on circumstances.

Using a cosigner is tricky for these reasons and should not be entered into lightly. Discuss your arrangement with your cosigner and be sure to work out contingency plans for worst-case scenarios involving a cosigner.

Those who fail to plan for these worst-case situations often find themselves experiencing worse conditions as a result. Don’t let a lack of communication threaten a good cosigning experience.

The Last Word On Cosigning On A Veteran Home Loan

Some neglect to research what their state’s laws have to say about these type of financial arrangements. If you don’t know what the laws of your state say about recourse in a cosigner relationship, what happens if the home gets foreclosed upon in such a situation, or what happens if the cosigner wants out of the agreement, you are at a major disadvantage.

Cosigning is a big step and you will want to know ALL your rights and responsibilities before you commit no matter if you are the veteran or the cosigner.

Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News

The VA loan offers qualified borrowers an incredible path to homeownership. However, veterans and active service members often ask if better options exist. Other options do exist – but none better than the VA loan. As such, we’ll use this article to answer the question: why choose a VA loan vs regular mortgage?

Specifically, we’ll discuss the following:

• VA Loan Overview
• Regular Mortgage Overview
• Why Choose a VA Loan vs Regular Mortgage
• Additional VA Loan Considerations
• Final Thoughts

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VA Loan Overview

VA loans serve as the US government’s means for encouraging homeownership among military members and veterans. The program has its roots in World War II. As troops returned from the war, Congress passed legislation – the original GI Bill – that included a mortgage provision. The goal of this program was to create a home loan that would provide an easy path to homeownership for troops.

While the program has changed over the years, the VA loan still provides eligible borrowers an outstanding path to homeownership. The Department of Veterans Affairs now administers the program, and the VA loan offers the following tremendous terms:

• No down payment required
• No private mortgage insurance (PMI) required
• Low interest rates
• Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)

Regular Mortgage Overview

When service members ask about “regular” mortgages, they typically want to know about two types of non-VA loans: FHA loans and conventional mortgages. We’ll briefly explain both of these here, and the remainder of the article will explain the advantages VA loans have over both options.

FHA Loan

Similar to the VA loan, the Federal Housing Administration, or FHA loan is a government-backed mortgage designed to encourage homeownership. In particular, the program aims to provide a low-cost mortgage option to low-to-moderate-income borrowers. But, despite this goal, no income ceiling exists for the program.

With FHA loans, borrowers can qualify for a loan with as little as a 3.5% down payment. Additionally, the program allows borrowers to receive that down payment in the form of savings, a financial gift from family members, or a down-payment-assistance grant. These outstanding terms generally make FHA loans the mortgage of choice for non-VA borrowers.

Conventional Mortgage

Whereas VA and FHA loans are specific loan products, conventional mortgage serves as more of an umbrella term. More precisely, the term conventional mortgage refers to home loans not backed by a government entity. Instead, banks and other mortgage lenders issue these loans based solely on their own lending criteria.

In general, lenders require down payments of at least 20% on a conventional mortgage. However, some lenders will approve loans with as low as 5% down, depending on the borrower’s overall financial situation.

Why Choose a VA Loan vs Regular Mortgage

No Down Payment Required

Down payments tend to be the largest obstacle buyers face when trying to purchase a home. Accordingly, the fact that the VA loan doesn’t require one makes it an incredible mortgage option, potentially saving buyers thousands of dollars in out-of-pocket costs.

For example, say you want to buy a home for $300,000. With a VA loan, you would have a $0 down payment (though you would still need to pay loan closing costs). On the other hand, this same loan would require a $10,500 down payment for an FHA loan ($300,000 x 3.5%) and a minimum of $15,000 for a conventional mortgage ($300,000 x 5%).

No PMI/MIP Required

When lenders accept less than a 20% down payment, they view the mortgage as riskier. To offset this risk, both FHA loans and conventional loans with less than 20% down payments require a form of insurance. Basically, borrowers pay insurance premiums to offset the increased risk of default due to the smaller down payments.

With FHA loans, borrowers must pay the program’s Mortgage Insurance Premium (MIP). This includes a one-time premium and a recurring, annual one. Similarly, conventional mortgages with less than 20% down mandate private mortgage insurance (PMI) until borrowers reach at least 20% equity in the home. While MIP and PMI are different programs, they function similarly. And, both can add thousands of dollars in costs to a borrower over the life of a loan.

VA loans do not require PMI or MIP.

Lower Annual Percentage Rates (APR)

When a lender promotes a mortgage interest rate, think of that as face value. On the other hand, once all of the fees, points, and other loan-related charges have been factored in, the cost of borrowing is known as APR. As a result, APR more accurately reflects the cost of a loan over its life.

Generally speaking, VA loans offer lower APRs than both FHA loans and conventional mortgages.

Streamlined Refinance Opportunity via IRRRL

The VA offers a streamlined way to refinance your current VA loan. Known as the Interest Rate Reduction Refinance Loan, this program allows borrowers to quickly and easily take advantage of lower interest rates.

With a normal refinance, you essentially apply for another mortgage. This means full income verification and the administrative hassle of applying for a loan. The VA’s IRRRL does not require income verification, making it an extremely easy refinance process for borrowers. The program was designed to make it as easy as possible for VA loan borrowers to save money when interest rates fall.

No Maximum DTI or Minimum Credit Score

With the VA loan, the VA doesn’t actually lend money. Instead, it guarantees the loans of a variety of VA-insured lenders (e.g. banks, credit unions, and mortgage lenders). In doing so, the VA provides lending guidelines, but borrowers must meet the approval criteria of their respective lenders. Of note, the VA’s program guidelines do not require a maximum debt-to-income (DTI) ratio or minimum credit score to qualify for a VA loan. This gives lenders more flexibility to approve a borrower based on his or her overall financial situation – and ability to repay the loan.

Conversely, both FHA loans and conventional mortgages typically cap DTIs at 43%. And, they also impose minimum credit scores, with most conventional loans requiring at least a 620, while FHA loans require a 580 minimum score (though exceptions exist). These requirements typically reduce the flexibility of lenders to approve FHA loans or conventional mortgages.

Additional VA Loan Considerations

For the above reasons, the VA loan generally makes far more sense than a regular mortgage. But, borrowers should still consider the following characteristics of a VA loan before making a final decision.

VA Funding Fee

While the VA loan doesn’t require PMI or MIP, it does require a VA funding fee. The VA uses this fee to offset the costs of the loan program to taxpayers. And, depending on the specific loan, this fee ranges from 1.4% to 3.6% of the total loan amount, with borrowers able to either pay up front or roll the fee into the loan principal.

However, 1) veterans with a service-connected disability, and 2) Purple Heart recipients do not need to pay the VA funding fee.

Occupancy Requirements

The VA loan exists to promote homeownership – not investing. As a result, the VA imposes an occupancy requirement. Borrowers must occupy the purchased property as their primary residence within 60 days of closing, and they must live there for up to a year.

FHA loans impose similar restrictions, but conventional mortgages can be used for pure investment property purchases. But, these investment property loans generally come with larger down payment requirements and higher interest rates.

However, for VA loan borrowers looking to rent out a property, a loophole exists. The VA loan allows borrowers to purchase up to a fourplex. And, so long as they occupy one of the units as their primary residence, they can rent out the other three.

VA Appraisal and MPRs

To support the program’s homeownership objective, the VA requires that all purchased properties are safe, sound, and sanitary. Simply put, a home must be habitable, with borrowers able to move in immediately. To enforce this, the VA has created property standards known as Minimum Property Requirements, or MPRs. When a VA-approved appraiser conducts the home appraisal, he or she will highlight any MPR issues in the final report. When VA reviewers see these issues, they will not approve the loan until the problems have been resolved.

While this can be an issue for a buyer, MPRs actually provide VA loan users negotiating leverage. If a seller wants to close a deal, he or she will need to work with you to resolve all MPR issues before closing, meaning you won’t need to once you move into the home.

Final Thoughts

Unless you want to buy a property strictly for investment purposes, VA loans are the best mortgage option for eligible borrowers. While regular mortgages have some advantages, VA loans simply offer more benefits to people looking to buy a primary residence.

Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.