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Financing Multifamily Homes With a VA Loan

multifamily homes

Becoming a homeowner allows you to stop paying rent and start building equity in a property that could potentially increase in value. It’s possible to up the investment value of your home purchase if you buy a property that provides a roof over your head and rental potential.

Enter: multifamily homes that feature more than one unit inside a single dwelling. With a small apartment building or duplex, individuals can live in one unit and rent out the others. This can provide homeowners with a source of income that subsidizes their living expenses or even covers them altogether.

VA loans, which were created to help veterans and qualifying spouses purchase properties with no money down, can also be used to purchase multifamily units. There are some rules and restrictions that govern how VA loans can be used for multifamily units, but it can be done.

If you’re a veteran or qualifying spouse with a VA loan entitlement and you’re considering an investment property, here’s what you should know.

How to buy a multifamily home using a VA loan

To qualify for VA loan that can be used to purchase a multifamily unit, you need to be certain you’re eligible for a VA loan entitlement to begin with. There are different requirements for veterans and active service members who served during wartime or peacetime.

Requirements also vary for veterans who were separated from service. National Guard and Selected Service members may also be eligible for VA loans based on their service, and qualifying spouses of veterans may also be eligible.

Once you determine you are eligible for a VA loan, you can apply for a Certificate of Eligibility with the VA.

While VA loans don’t come with specific income requirements, they do require you to have “residual income” — or income left over after all your bills and living expenses are paid. VA loan residual income requirements vary by state.

The VA will also consider your debt-to-income ratio — the percentage of your income required to service your debts. Most VA lenders set a maximum DTI ratio of 41%, but this figure can vary by lender.

There is no minimum credit history requirement for a VA loan, nor is there a minimum credit score. It’s up to VA lenders to check whether your credit score is satisfactory per their judgment, and many only offer VA loans to borrowers with scores over 620. If you have made credit mistakes in the past, you may still be able to qualify for a VA loan, provided you can explain your past issues and prove some history of responsible credit use.

Property requirements

VA loans can be used to purchase multifamily properties with up to four units, provided they meet all other requirements from the VA. The veteran has to occupy one of the properties to qualify for the loan, however. This is one of the key components of making this strategy work.

In other words, you cannot use a VA loan to purchase a multifamily property for investment purposes only. You can rent out any remaining units as a landlord, but you have to live in one unit to qualify.

VA loans also have minimum property requirements that govern the shape and condition of the home, along with other factors. The main requirements follow:

  • The property must be accessible from a public or private street
  • There must be access to the unit and rear yard without passing through another unit
  • Adequate space between buildings is required
  • The property must be a single, “readily marketable real estate entity”
  • The property must be primarily zoned residential
  • Must have suitable sanitary facilities and space for living, dining and sleeping
  • Utilities must be separate for each unit, although multiple units can share utilities if there are individual shutoffs
  • Some facilities, such as laundry and heating, can be shared in two to four unit buildings
  • Mechanical systems must be safe and heat must be adequate
  • Each unit must have adequate electrical access
  • Each unit is required to have adequate potable water supplies and hot water access
  • Every unit is required to have a safe method for sewage disposal
  • The roof must be safe and the property must have adequate ventilation
  • Any party walls constructed on the property must reach the height of the building
  • The site must be properly graded and any improvements deemed safe
  • No lead-based or defective paint
  • Property must be free of hazards

Also note that there are VA loan limits on how much you can borrow. These limits vary by county and can be much higher in areas with a high cost of living. They are also considerably higher for multifamily units when compared to single-family homes.

For most areas of the country, the VA loan limit for multifamily properties with four units is $931,600. For a duplex in most counties, the limit is $620,200. You can find out the loan limits in your area on the U.S. Department of Veterans Affairs website.

Income requirements for multifamily units

We already shared how the VA requires eligible veterans to have a certain amount of residual income each month (based on where they live) and an acceptable DTI ratio. The waters get a bit more muddied when it comes to income requirements for multifamily units, as you may or may not be able to count rental income.

Generally speaking, you may be able to count up to 75% of fair market rent for units you’re not occupying to qualify for a VA home loan. However, not all lenders will allow you to count this income unless you have experience as a landlord. For example, prominent VA lender Veterans United says they will only count up to 75% of rental income if you can provide documentation that you have at least two years of experience as a landlord or property manager.

If you aren’t able to count rental income to qualify for the VA loan, your income must be sufficient to qualify for the loan to purchase the property. This could be a challenge if you’re counting on rental income to be able to afford a multifamily house.

Cash reserves

In addition to income requirements and property requirements, you may also need to have a certain amount of cash reserves on hand to purchase a multifamily home with a VA loan.

Generally speaking, lenders require six months of cash reserves to qualify for a VA loan for a multifamily property if you plan to count rental income. This means you have to have six months of mortgage payments set aside when you apply for a loan, including costs of taxes, insurance and homeowner’s association fees.

If you can qualify to purchase a multifamily unit with a VA loan using your income alone, however, this cash reserves requirement is typically waived.

Tips for getting a VA loan on an investment property

If you believe a multifamily unit is the perfect way to use your VA loan entitlement, there are steps you can take to start preparing now — even if your purchase is several years away.

Start building cash reserves

While VA loans don’t require a down payment, you may be required to have six months of cash reserves to purchase a multifamily unit if you plan to count rental income to qualify for a mortgage. For that reason, it’s smart to start saving up now. This way, you’ll have the cash you need once you’re ready to buy.

Even if you can qualify to purchase a multifamily unit without rental income, it’s still a good idea to start building up your savings account. You may need money to make updates or repairs after the purchase is complete, and it never hurts to have a savings buffer anyway.

Pay down debt

VA lenders will consider your DTI ratio when they decide whether to approve you for a loan, so it’s smart to reduce this figure if you can. While earning more money can lower your DTI ratio, you can accomplish the same task by reducing your debts.

Pay down high-interest debt such as credit cards first, as these debts generally charge the highest amount of interest each month. You can also strive to pay off car notes, personal loans and any other debts you have.

Improve your credit score

Finally, you can also take steps to improve your credit score. While the VA doesn’t list a minimum credit score requirement, lenders that offer VA loans do typically enforce a minimum credit score when deciding to whom they will lend. If your credit score is below 620, you may not qualify for a VA loan.

Taking steps to improve your credit score now can ensure you’ll have no problem qualifying once you’re ready. To make the biggest positive impact on your credit score right away, make sure to:

  • Pay all of your bills on time or early
  • Pay down debt to decrease your credit utilization
  • Keep account balances low
  • Don’t open or close too many credit card accounts
  • Take steps to avoid identity theft

Bottom line

If you’re a qualifying veteran who wants to purchase a multifamily home, there are numerous reasons to consider using your VA loan for this benefit if you also want to live in the property.

Benefits of using a VA loan include the fact that you don’t have to have a down payment (although you may need to have six months of cash reserves), and there is no minimum credit score. Loan limits for multifamily units can also be rather high; VA loans offer competitive interest rates, and you won’t have to pay private mortgage insurance. Closing costs may also be lower for VA loans when compared to a traditional mortgage.

Keep these details in mind as you prepare your finances to purchase a multifamily unit this year or sometime in the future. There are plenty of reasons to use a VA loan to buy a property with more than one unit, so you should start preparing as early as you can.

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