8 Steps to Getting a VA Loan for a Multifamily Home
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One way to achieve the dream of homeownership if you’re a military service member or veteran is to finance a multifamily home with a VA loan backed by the U.S. Department of Veterans Affairs. Going this route allows you to enjoy the perks of homeownership while earning rental income as a landlord at the same time.
Active-duty service members and veterans represent 23% of U.S. homebuyers, according to a 2020 report from the National Association of Realtors. Before you can join their ranks, though, you’ll first need to understand the borrowing requirements for getting a VA loan for a multifamily home.
What is a multifamily home and why buy one?
A multifamily home is a single building that houses separate dwelling units for different families. A multifamily home typically might be a duplex with two units, a triplex with three units or a fourplex that has four units.
Owning a multifamily home gives you the opportunity to build home equity and become a real estate investor through “house hacking,” which means you live in one of the units while renting out the others to generate rental income. You use the extra income to help offset some or even all of your monthly mortgage payments and other housing-related expenses.
Can you buy a multifamily home with a VA loan?
Buying a multifamily home with a VA loan comes with several benefits. For instance, you don’t need to pay for mortgage insurance and there’s no down payment required in most cases. You can buy up to four units with a VA loan, with the exceptions of joint loans that may allow you to buy more.
Be ready to become both a landlord and a homeowner quickly, though. You may have to move into one of the units within 60 days after the loan is closed and make the unit your primary residence and live there for at least the first year.
Steps to buying a multifamily home with a VA loan
1. Ensure that you meet the minimum service requirements. If you’re a veteran, an active-duty service member or a member of the Reserves or the National Guard, you’ll need to apply for a Certificate of Eligibility online, by mail or through your lender. That’s the proof to lenders that you qualify for the VA-guaranteed loan benefit. Surviving and other eligible spouses may also qualify.
2. Check the multifamily loan limits in your area. Even though the VA doesn’t limit the size of the multifamily loan you can get, lenders typically have additional requirements for loans that exceed the local conforming limits. In general, you’ll likely see limits of $981,700 for a four-unit multifamily home, $789,950 for a triplex and $653,550 for a duplex without the need for a down payment. In higher-cost counties, the limit goes up to $1.47 million for a four-unit home.
3. Know the VA’s minimum mortgage requirements. In order to get a VA loan, you’ll need to meet certain VA loan requirements, including:
- Down payment: You don’t need a down payment for a VA loan in most cases.
- Credit score: Even though the VA doesn’t require a minimum credit score, VA lenders generally prefer a score of at least 620.
- Income: The VA doesn’t have a minimum income requirement but its underwriting guidelines ask lenders to make sure borrowers can meet mortgage repayment, living expenses and other debt obligations. In general, lenders expect your debt to not exceed 41% of your income. The amount of rent you expect to collect also could be included in your income calculation. Per VA guidelines, your estimated rental income is 75% of either verified rent previously collected from an existing property or the fair monthly rental amount estimated by an appraiser.
- Employment history: Lenders generally will ask that you have a minimum of two years of employment history, but if you were recently discharged, some exceptions could be made.
4. Study the minimum property requirements in your area. To protect the interest of VA borrowers, lenders and other parties, the VA has a list of requirements to help ensure properties are “structurally sound and safe.” There may be additional local property requirements, too. For instance, in Hawaii, your property needs to undergo wood-destroying insect inspections.
5. Shop around with VA-approved lenders. The process follows similar steps you’d take to get a standard VA loan, except lenders will want to see projected rental income from the units you expect to rent out. You’ll likely pay your lender a loan origination fee equal to 1% of the loan amount for processing your loan file, according to the VA.
6. Find a real estate agent. An experienced real estate agent who’s knowledgeable about local market conditions can help you find the home that best suits your needs.
8. Find tenants and draft rental lease agreements. You can work with a real estate agent to vet tenants and come up with a rental agreement. You may also want to consult a real estate attorney to look over the contract. Be prepared to run credit and background checks on prospective tenants.
Pros and cons of buying a multifamily home with a VA loan
- You don’t need a down payment. As long as the sales price doesn’t exceed the home’s appraised value, you can get a VA loan with no money down. Nearly 90% of all VA-backed home loans are made without a down payment.
- You won’t pay private mortgage insurance (PMI). Conventional loans require you to have PMI if your down payment is less than 20% of the mortgage. Since the VA backs a percentage of your loan in case you default, you won’t need to pay mortgage insurance fees.
- You won’t have a prepayment penalty. You can pay off your mortgage early without the prepayment fee that conventional lenders may charge.
- You can buy up to seven units with a joint VA borrower. Up to six of the units can be used as residential units and one can be used for business purposes, according to VA guidelines.
- You must have past experience managing rental units. The VA also accepts some background in both property maintenance and rentals to ensure you have a shot at succeeding as a landlord.
- You must meet the VA’s cash-reserve requirements. You’ll need to have at least six months’ worth of monthly mortgage payments (including principal, interest, taxes and insurance) in cash assets to qualify for a VA loan for a multifamily home.
- You must live in one of the homes as your primary residence at the time of purchase. Being a landlord while living next to your tenant and taking care of repairs and other requests may not be everyone’s cup of tea.
- You must get a VA home appraisal. This ensures your property meets a long list of VA minimum property requirements. The VA appraisal process may end up taking more time and money than you expect if repairs are required.