The VA loan doesn’t require a down payment, making it a great home-buying option for eligible borrowers. But, some situations still require borrowers to demonstrate assets to qualify for a loan. And, with the advent of cryptocurrencies like Bitcoin and Ethereum, borrowers frequently ask about using them to meet VA requirements. As such, we’ll use this article to discuss the considerations behind using Bitcoin as assets for a VA loan.
Specifically, we’ll discuss the following:
- VA Loan Overview
- Situations When You Need Assets for a VA Loan
- Using Bitcoin, Ethereum, and Other Cryptocurrencies as VA Loan Assets
- Tax Implications
- Final Thoughts
VA Loan Overview
The VA loan has its roots in the Servicemen’s Readjustment Act of 1944 – the original “GI Bill.” Currently, this loan product offers eligible borrowers an outstanding mortgage option. In particular, the VA loan includes these characteristics:
- No down payment required
- No private mortgage insurance (PMI) required
- Low interest rates
- Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)
With most mortgages, borrowers need to demonstrate that they have the assets to cover down payment requirements. Fortunately, the VA loan does not require a down payment. But, borrowers in certain situations still need to demonstrate assets to qualify for a VA loan. For these borrowers, the question becomes, can I use my Bitcoin, Ethereum, or other cryptocurrency holdings to meet these asset requirements?
Situations When You Need Assets for a VA Loan
Generally speaking, if you use the VA loan to purchase a single-family home, you do not need to demonstrate assets to qualify. But, three situations exist where borrowers do, in fact, need to demonstrate assets – as cash or cash equivalents – in order to qualify for a VA loan. Accordingly, before asking about using Bitcoin for these requirements, borrowers should first understand the actual requirements:
Situation #1: Assets for Troops Nearing Active Duty Separation
Before approving a VA loan, lenders will want to confirm that you have enough income to repay that loan. To verify military income, lenders review your Leave and Earnings Statement (LES). This LES also includes your projected date of separation from the military. If your LES shows a separation date within 12 months, you may need to demonstrate assets to qualify for a VA loan.
Borrowers with a separation date within 12 months can avoid an asset requirement if they meet one of these criteria:
- Documentation confirming your re-enlistment
- An accepted civilian job offer
- A signed letter from your CO stating re-enlistment eligibility plus a signed letter stating that you intend to re-enlist
If you don’t meet one of these criteria, the VA requires that lenders get “documentation of other unusually strong positive underwriting factors, ”to include a 10% down payment and “significant” cash assets.
Situation #2: Assets for Borrowers with Other Rental Properties
Borrowers who own other rental properties will also need to demonstrate assets to qualify for a VA loan. Essentially, the VA wants to confirm that, if you lose a tenant at one of these other properties, you can still cover the mortgage payments plus your VA loan payment.
The VA requires asset reserves totaling three months of principal, interest, tax, and insurance (PITI) payments for the rental property(ies). For example, say the mortgage on your rental property is $1,500/month, which includes all the PITI elements (as most residential mortgages do). You would then need to demonstrate at least $4,500 in cash or other liquid assets ($1,500/month x 3 months).
Situation #3: Assets for Borrowers Buying a Multifamily Property
The last asset scenario involves buyers using the VA loan to purchase a multifamily property (duplex, triplex, or quadplex). To qualify, these borrowers will need to document at least six months of cash or liquid assets for the future VA loan’s monthly payments (PITI).
For example, say you plan on buying a quadplex, live in one unit, and rent out the other three (which the VA allows). And, assume that the total monthly mortgage payments (PITI) on this future VA loan total $3,000. In this situation, you’d need assets of at least $18,000 ($3,000/month x 6 months).
Using Bitcoin, Ethereum, and Other Cryptocurrencies as VA Loan Assets
All of the above asset situations share a common requirement: cash. Lenders will not accept cryptocurrencies directly. As a result, if you plan on using Bitcoin or Ethereum to meet asset requirements, you need to take an additional step. Borrowers need to liquidate these assets, that is, sell and convert them to cash. Once you make these sales, lenders will then verify that the cash has been deposited into one of your accounts.
For example, if you have $100,000 in a Bitcoin wallet, showing a lender that account balance will not suffice for asset verification. Instead, you’ll need to A) sell your holdings, and B) deposit the funds into a cash account. Lenders will then verify this cash by reviewing your account statements. In this fashion, you can indirectly use Bitcoin as assets for a VA loan. That is, you can convert your cryptocurrency holdings into cash and use the cash to cover the loan-related asset requirements.
The Importance of Documentation
Closely related to asset verification, lenders will demand clear documentation of any Bitcoin, Ethereum, or other cryptocurrency asset conversions. More precisely, lenders will require a clear paper trail confirming that A) you own the crypto holdings, and B) you have converted them to cash.
Unfortunately, most cryptocurrency wallets don’t provide traditional monthly/quarterly account statements like bank accounts. Rather, you’ll need to confirm what sort of documentation your lender will accept. For instance, some lenders may accept screenshots of your wallet for the past couple months. Ultimately, it’s up to the individual lender, so confirm early in the VA loan application process what sort of documentation they’ll need to cover their cryptocurrency-to-cash paper trail requirements.
NOTE: The federal government also mandates that lenders follow strict anti-money laundering requirements. As a result, if you have any large Bitcoin or other cryptocurrency purchases, plan to document where you received the original funds to make those purchases.
Prior to selling Bitcoin, Ethereum, or other cryptocurrency holdings to cover VA loan asset requirements, borrowers should consider the potential tax implications. Due to the fact that the IRS treats cryptocurrency as property, sales are subject to property-related taxes. In other words, if you sell your holdings for more than you purchased them, you will be subject to capital gains taxes. And, depending on how long you held that cryptocurrency, you’ll either pay ordinary income tax rates or the more favorable long-term capital gains rates.
Bottom line, if unsure of the tax implications of a cryptocurrency sale, you should consult with a tax professional. With proper planning and tax strategies, you can at least minimize the tax bill you’ll face for a sale.
Unfortunately, borrowers cannot directly use Bitcoin, Ethereum, or other cryptocurrencies to cover VA loan asset requirements. But, if willing to convert these holdings to cash, you can indirectly use them as your VA loan assets. Before doing so, just be sure to consider the potential tax implications of any crypto sales.