8 Steps to Getting a VA Loan for a Multifamily Home

Military service members have a big advantage when it comes to buying a multifamily home: They don’t need a down payment if they take out a home loan backed by the U.S. Department of Veterans Affairs (VA). However, before you tackle the responsibilities of both homeowner and landlord, there are some important requirements you’ll need to understand to get a VA loan for a multifamily home.

What is a multifamily home and why should I buy one?

In most cases, a multifamily home is a single building that houses two, three or four separate dwelling units for different families. A property with two, three or four units may also be called a duplex, triplex or fourplex.

The VA requires you to live in one of the units while renting out the others for rental income. Also known as “house hacking,” this strategy gives you the opportunity to build home equity and become a real estate investor. The extra income may offset some or even all of your monthly mortgage payments and even allow you to pocket extra cash to cover other housing-related expenses.

3 reasons to buy a multifamily home with a VA loan

There are three major benefits to buying a multifamily home with a VA loan versus other loan programs:

1. No down payment is required. Multifamily homes can be purchased without a down payment if you have enough VA entitlement. By comparison, loans backed by the Federal Housing Administration (FHA) require at least a 3.5% down payment while conventional loans backed by Fannie Mae require 5% down for two- to four-unit homes. 
2. No mortgage insurance is required. VA loans don’t require mortgage insurance, which is required to help lenders recoup money lost if you default on an FHA or conventional mortgage.
3. Two eligible veterans can buy up to a six-unit property. The VA has a special “joint loan” option for two or more veterans to purchase a multifamily home with up to six units, plus one business unit. Other loan programs limit you to a four-unit maximum.

How to use a VA loan for a multifamily home purchase

1. ENSURE THAT YOU MEET THE MINIMUM SERVICE REQUIREMENTSIf you’re a veteran, an active-duty service member or a member of the Reserves or the National Guard, you’ll need to provide proof that you qualify for a VA-guaranteed home loan. Most service members verify their eligibility by applying for a certificate of eligibility online, by mail or through their lender. Surviving and other eligible spouses may also qualify.

2. CHECK THE MULTIFAMILY LOAN LIMITS IN YOUR AREAEven though the VA doesn’t limit the size of the multifamily loan you can get, lenders often set their own requirements based on local conforming loan limits. The current multifamily limits in most parts of the country are:

• $981,500 for a two-unit home
• $1,186,350 for a three-unit home
• $1,474,400 for a four-unit home

3. KNOW THE VA’S MINIMUM MORTGAGE REQUIREMENTSIn order to get a VA loan, you’ll need to meet certain VA loan requirements, including:

• Down payment: Not required if you have enough entitlement.
• Credit score: Even though the VA doesn’t require a minimum credit score, VA lenders generally prefer at least a 620 score.
• Debt-to-income (DTI) ratio: In general, lenders expect your debt to not exceed 41% of your income, which is known as your DTI ratio. You may also be able to count income up to 75% of the verified rent on the extra units, the current rent collected on the property you’re buying or the fair market rent as estimated by a VA appraiser.
• Employment history: Lenders generally ask that you have a minimum of two years of employment history — however, some exceptions could be made if you were recently discharged.
• Cash reserves. You’ll need to document enough extra cash to cover up to six months of principal, interest, taxes and insurance (PITI) for each unit you rent out. Also called mortgage reserves, these funds must be easily converted to cash — checking and savings accounts are the preferred choice, but you may be able to use balances in a 401(k) or other retirement accounts.
• Funding fee. VA borrowers must pay a VA funding fee of between 1.25% and 3.30%, depending on their down payment and whether they’ve used their home loan benefits before. The fee is charged to offset the taxpayer cost of the VA loan program.
• Rental management experience. The VA requires proof that you’ve managed a rental property before, or have hired a property management company to qualify you with rental income on a multifamily home purchase. 

4. REVIEW THE VA HOME APPRAISALTo protect the interest of VA borrowers, lenders must obtain a VA appraisal for VA-financed multifamily homes. Besides estimating the home’s value, the appraiser must ensure the home meets minimum property requirements and is “structurally sound and safe.” Due to the extra research required to assess a multifamily home, your appraisal costs will be more expensive than they would be for a single-family home.

5. SHOP AROUND WITH VA-APPROVED LENDERSCheck out loan estimates from at least three to five mortgage lenders to get the best deal. The VA loan process follows similar steps you’d take to get a VA loan for a single-family home, except lenders will want to see projected rental income from the units you expect to rent out. One thing to note: Lenders can only charge an origination fee equal to 1% of the loan amount for processing your loan file, according to the VA.

 Read more about our picks for the best VA loan lenders.

6. FIND A REAL ESTATE AGENTAn experienced real estate agent who’s knowledgeable about selling homes with VA loans will know how to negotiate the closing costs the seller can pay (up to 4% of your loan amount). If your home’s value comes in lower than the price you offered, a VA-experienced agent will know how to use the VA amendatory clause to cancel your contract and get you all your upfront money back.

7. CLOSE ON THE LOANReview the VA closing costs on your final closing disclosure three business days before closing. Make sure the lender removes your funding fee if you’re exempt due to a service-related disability, and that you’re not paying any non-allowable fees.

8. FIND TENANTS AND DECIDE WHO WILL MANAGE YOUR RENTALSYou 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, or pay a property management company to take over landlord responsibilities.

Pros and cons of buying a multifamily home with a VA loan

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