Are leasehold properties eligible for VA home loan financing?
The answer is YES, as long as they meet these VA loan leasehold requirements:
- The lease expiration exceeds the loan term by 14 years (thus, 44 years for a 30-year VA loan).
- During the duration of the loan term, the lease fee is fixed.
- The payment amount can change over the life of the loan, but it must be a known amount. So, the lease cannot be renegotiated, but the payment amount can step up every so often.
What is a leasehold property and how does it differ from a fee simple property?
- The leasehold interest happens when a fee simple land-owner enters into an agreement or contract called a “ground lease” with a lessee.
- A lessee buys leasehold rights much as one buys fee simple rights. However, the leasehold differs from fee simple in the following ways:
- The buyer of residential leasehold property does not own the land and must pay ground rent.
- Use of the land is limited to the remaining years covered by the lease.
- Furthermore, the use, maintenance, and alteration of the leased premises are subject to any restrictions contained in the lease.
- Upon completion of the lease, the land returns to the land-owner (lessor), which is called reversion.
- Depending on the provisions of any surrender clause in the lease, the buildings and other improvements on the land may also revert to the lessor.
In summary, when the purchaser (the lessee) buys a leasehold property, they buy the right to dwell in and utilize the property for the time period stated in the lease agreement. They make rent payments to the land-owner (lessor) and abide by the other terms of the lease.
Fee Simple Properties:
- Fee simple is the most complete form of ownership.
- A buyer acquires ownership of the entire property, including both the land and buildings.
- Buyers possess, use the land and dispose of the land as they wish: sell, give it away, trade it for other things, lease to others, or pass it to others upon death.
Required Documentation/Copies for Leasehold Properties:
- The lease identifying the property to be leased, lessor, lease term, and rent
- All preceding assignments that may have occurred prior to the current assignment
- Sales contract and/or
- Veteran-lessee consent statement in cases of age or income restricted leasehold communities