Can I Get a VA Loan with Crypto?

Crypto – or cryptocurrency – has exploded in popularity recently. As a result, many veterans have cryptocurrency wallets with significant value. This has led a lot of these veterans to ask, can I get a VA loan with crypto? While you cannot use crypto directly, options do exist for these home buyers, and we’ll use this article to discuss how you can use crypto for VA loan requirements.

Specifically, we’ll discuss the following:

• VA Loan Overview
• What is Crypto?
• Getting a VA Loan with Crypto
• Tax Implications
• Final Thoughts

VA Loan Overview

Administered by the Department of Veterans Affairs, the VA loan offers eligible borrowers these outstanding terms:

MORE: Veterans Can Buy a Home with $0 Down

• 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, despite not needing a down payment, borrowers will still need to A) pay closing costs, and B) demonstrate an ability to repay the loan. Accordingly, when borrowers ask about getting a VA loan with crypto, they are likely asking about using crypto to cover the VA loan’s closing costs or income requirements.

We’ll discuss both scenarios in this article.

What is Crypto?

We need to define crypto prior to explaining how to use it with VA loans. More precisely, we need to discuss this relatively recent phenomenon in the context of the IRS. VA loans – and mortgages, in general – are heavily regulated by the federal government. As a result, lenders look closely at IRS guidance when considering any sorts of assets, particularly newer ones like crypto.

According to the IRS, cryptocurrency: […] Is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. However, the term virtual currency is somewhat misleading, as the IRS doesn’t actually consider crypto as actual currency like US dollars. Rather, it: […] is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency. 

Put simply, the IRS considers cryptocurrency to be property – not currency. As a result, most lenders will not accept your cryptocurrency holdings directly. Despite this reality, options do exist to use crypto to get a VA loan, which we’ll discuss in the next section.

Getting a VA Loan with Crypto

As stated, two broad scenarios exist where borrowers would potentially need to use crypto to meet VA loan requirements. Below, we’ll first outline these two scenarios. Then, we’ll explain how borrowers could use crypto to meet the associated requirements for each scenario.

Potential Crypto Scenario 1: VA Loan Closing Cost

Despite not requiring a down payment, VA loan borrowers will need to demonstrate that they have enough cash on hand to cover the VA loan’s closing costs. Some of these items – like the VA loan funding fee – can be rolled into the loan principal and paid off over time. Others need to be paid in cash when you close on your loan.

Every situation is unique. But, as a rule of thumb, borrowers should plan for paying 3% of the loan amount in closing costs. For example, you should set aside $7,500 on a $250,000 loan ($250,000 x 3%). Your actual closing costs may be more or less, but this rule of thumb provides a solid guideline for planning purposes.

To verify that you have enough cash or liquid assets on hand to close, lenders will review bank statements, savings accounts, and any investment accounts you plan on using to cover closing costs.  

Potential Crypto Scenario 2: Meet VA Lender Income Requirements  

Before approving your loan, VA lenders will verify your income. Basically, these lenders want to make sure you have enough money coming in to continue making your monthly mortgage payments.

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 significant assets – as cash – to qualify for a VA loan. In theory, if you don’t have documented income, you can use these assets to make regular payments.

Borrowers with a separation date within 12 months can avoid this 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 the above 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.

Using Crypto for the Above VA Loan Scenarios

Both of the above scenarios share a common requirement: cash. As a result, if you plan on using crypto, you need to take an additional step. In Scenario 1, lenders won’t accept direct transfers from your cryptocurrency wallet to cover closing costs. In Scenario 2, nor will they accept your crypto holdings in lieu of documented cash reserves. Instead, borrowers will 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 traditional bank accounts.

For example, if you have $10,000 in a crypto account to cover closing costs, showing a lender that account balance will not suffice. 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 crypto to get a VA loan. That is, you can convert your crypto holdings into cash and use the cash to pay the loan-related costs or meet reserve requirements.

The Importance of Documentation

Closely related to cash verification, lenders will demand clear documentation of any cryptocurrency assets. 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 crypto-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 crypto purchases, plan to document where you received the original funds to make those purchases.

Tax Implications

Prior to selling crypto holdings to cover VA loan 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.

Final Thoughts

When borrowers ask about using crypto to get a VA loan, two relevant scenarios exist: 1) using crypto to cover closing costs, or 2) using it to meet cash reserve requirements in lieu of income. In both of these scenarios, borrowers can sell their crypto holdings to get a VA loan, but they cannot use crypto directly.

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.