Buying a Multi-Family Property With a VA Loan

It has no down payment or mortgage insurance, and the best part is that you can use your Florida VA benefit to buy a new house, build one from scratch, or improve your existing property.

This guide explains how to use your Florida VA benefit to buy a multifamily home in 2023.

Can I Use a VA Loan to Purchase a Multifamily Home?

Typically, VA loans are for single-family homes. However, you can use a VA loan to purchase various properties, including multifamily homes. The multi-unit property can have up to four units, considered four single-family homes.

Since VA loans are for primary residences, you must reside in one of the units full-time. The unit will be your principal residence, while you can rent out the rest to earn additional income.

Even though you can’t use a VA loan for an investment property, it is very much possible to use the loan to invest in a multifamily home for rental purposes.

The VA has no issue with house hacking so long as you reside in one of the units. You can use the rental income to pay your monthly mortgages and supplement your current income.

Using VA Loans to Buy a Multifamily Home in Florida?

Using your VA benefit to buy a multifamily property can be challenging since many lending institutions only finance single-family homes. However, you can overcome this obstacle by finding a credible lender.

After all, a reputable lender will follow VA guidelines which allow borrowers to purchase multifamily properties with up to four units.

The only catch is that you cannot use a multi-unit property for investment or rental purposes. VA occupancy guidelines state that you must reside in one unit as your primary residence.

A multifamily home offers a massive opportunity to earn additional income from the property. You can rent the remaining units to help subsidize your monthly mortgage payments.

Can I Qualify for a VA Loan Using Rental Income?

VA loans have various income requirements. As with most home loans, the lender wants to be sure you have adequate income to cover your monthly mortgage payments. Fortunately, you can qualify for a VA loan using the existing or projected rental income.

The existing or projected rental income from the multi-unit property you intend to buy can help you meet the income requirements demanded by the lender. The lender will usually calculate 75% of the property’s rental income as your total income before determining whether you qualify for the loan.

Nevertheless, using rental income as a qualifying factor for a VA loan is not always ideal. After all, calculating the projected rental income can be challenging. Besides, many lenders have strict guidelines for counting rental income, making it more difficult to qualify for a loan.

If you want to use rental income as a qualifying factor, you must meet the following requirements:

Six Months of Reserves

If you intend to use the projected rental income from the property you plan to buy, you must have six months of mortgage payments in cash reserves. These include the principal, interest, taxes, and insurance (PITI).

For instance, if the calculated monthly mortgage payment is $4,000, you must have $24,000 in cash reserves to qualify for a VA loan using projected rental income.

If you intend to use the current rental income to qualify for a VA loan, you must have at least three months of mortgage payments in cash reserves. This money will cover the principal, interest, taxes, and insurance.

The funds should be sufficient to pay PMI and HOA fees for three months. You may also need to produce tax returns, receipts, a rental agreement, or any documentation showing actual rent payments over the past two years.

Whether using the current or projected rental income, you cannot use gifts or grants as cash reserves. Also, you cannot use the equity in the property or cash proceeds from a cash-out refinance as reserves to meet PITI requirements. The cash reserves must be your own funds from your savings or contribution.

Proof of Landlord Experience

A lender will require proof of landlord experience before pre-approving your VA loan application.

The loan officer wants to assess the likelihood of your success as a landlord, so you must provide evidence of at least two consecutive years in property management. If not, you may have to hire a reputable property management company to handle your rental operations.

The multifamily home you intend to buy shouldn’t be challenging to rent out to prospective tenants. Select a multi-unit property that doesn’t have issues to help attract high-quality renters, especially if you plan to use the rental income to pay the monthly mortgage payments.

Counting Rental Income for VA Loans

The VA defines rental income as any money received for leasing a housing unit to a tenant. A multifamily home can have up to four units, and you must occupy one unit as your primary residence to qualify for a VA loan.

Lenders usually calculate rental income by including 75 percent of the indicated amount on the rental or lease agreement to your effective income. You can only use not more than 75 percent of the rent to offset the mortgage expenses on the current rental property.

For instance, if your mortgage payment is $1,000 and the current or projected rental income is $1,500, the underwriter will use $1,000 to offset your existing mortgage. The remaining $500 won’t count.

VA Loan Rental Income Documentation Requirements

The lender might require proof showing your rental income earnings before pre-approving your application. If you use the rental income for a separate property you own, you must have a two-year rental history itemized on your tax returns.

You must fill out the Schedule E form to show these details. You can also include property depreciation claimed as deductions in your effective income.

If using the existing rental income from the property you intend to buy, you must provide a signed lease or rental agreement. If you don’t have a signed lease, you may need to enlist a licensed rental appraiser to estimate the rental income and prepare the documentation on your behalf.

Do I Need Cash Reserves If I Don’t Use Rental Income to Qualify for a VA Loan for a Multifamily Home?

Qualifying for a VA multifamily home loan using rental income can be confusing, if not challenging. After all, you must meet various income requirements to qualify for the loan using your rental income.

First, you must have at least six months of cash reserves to cover the principal, interest, taxes, and insurance. Then again, the lender requires two consecutive years of landlord experience before deciding whether to pre-approve or reject your application.

The good news is that you don’t need to use rental income to qualify for a VA loan for a multifamily home. You can present your salary/W-2 income or military income as a qualifying factor for a VA loan. The loan officer will evaluate your income to determine whether it can cover your monthly mortgage payments.

Your goal should be to use your own income to qualify for the payment. One benefit of using your salary to qualify for a VA loan is that you don’t require cash reserves. This move can help accelerate the pre-approval process, allowing you to purchase your multifamily home.

Besides, your loan amount could be higher as compared to when using a projected rental income when applying for a VA loan.

Can Two or More Borrowers Combine Their VA Entitlements for a Multi-Unit Property?

VA guidelines allow joint borrowers to apply for a loan. The co-borrowers can purchase multi-unit properties, each having up to four units. However, the joint applicants must intend to occupy each multifamily home as their primary residence to qualify for the loan.

Acceptable VA loan co-borrowers include:

• A veteran and non-veteran spouse.

• Two married veterans with both using their entitlement.

• Two married veterans with only one using their entitlement.

• Two non-married veterans with both using their entitlement.

• A veteran and a non-veteran, non-spouse.

All VA loan co-borrowers must meet VA financial guidelines to qualify for the loan as other applicants. These include individual income requirements and debt-to-income ratio, among other qualifying factors. The credit history of your co-borrower can impact your pre-approval chances negatively or positively.

Why Use Personal Income Over Rental Income to Qualify for a VA Loan?

Using the current or projected rental income to qualify for a VA loan might seem like an easy way out. However, you’re better off qualifying with your personal income, given the numerous stringent requirements that apply when using the rental income.

Here are the top benefits of using personal income over rental income to qualify for a VA loan.

Seamless Application Process

Using your income to apply for a VA loan ensures a smooth and seamless application process. After all, you don’t need to submit numerous documents like signed lease or rental agreements and property tax returns with itemized details.

You only need to present your pay stubs or bank statement showing your income. Besides, calculating rental income can be hectic even for the most experienced officials.

Better Approval Chances

You have better chances of pre-approval by using your income rather than rental income.

Most lenders have strict guidelines for calculating rental income from multi-unit properties, making it harder for applicants to qualify for VA loans. You won’t be eligible for the loan if the projected rental income cannot cover the mortgage costs.

No Rent Appraisal Costs

You must produce an appraisal report when using projected rental income as a qualifying factor for a VA loan. Hiring a licensed rent appraiser costs money, eventually increasing your mortgage costs.

Besides, the entire process can be tedious and time-consuming. You can avoid all these problems by prioritizing your income as the qualifying factor for a VA loan.

Rental Income Acts as Additional Income

If you use your income to qualify for a VA loan, you can relax knowing that the rental income from the property will be extra earnings.

It does not have to cover your mortgage payments, including the principal, interest, tax, and insurance. You can save or use the additional revenue to safeguard your financial future.

Downsides of Using Rental Income to Qualify for a VA Loan

Many borrowers prefer to use rental income to qualify for a VA loan for a multifamily home. However, this method can be challenging and confusing, especially when dealing with an unwilling or inexperienced lender.

Besides, it has numerous stringent requirements that could dent your pre-approval chances. With that said, here are reasons why you should avoid using rental income to qualify for a VA loan:

Cash Reserves

If you intend to use the projected rental income from the property you plan to buy, you must have six months of mortgage payments in cash reserves. These include the principal, interest, taxes, and insurance (PITI).

If you apply using the current rental income, you must have three months of cash reserves in the bank. Besides, the funds should sufficiently pay PMI and HOA fees for three months. You cannot use gifts or grants as cash reserves.

Landlord Experience

The lender wants to evaluate the likelihood of your success as a landlord before pre-approving your loan using rental income. For this reason, you must provide proof of at least two consecutive years in property management.

If you don’t have landlord experience, you must hire an experienced property manager or management company to handle your rental property.

Prolonged Application Process

The application process can be long and tedious, making you lose out on a prime property. The lender must calculate your rental income against your mortgage payments.

You must also prepare various documents and perform appraisals on the multi-unit property to determine the correct rental income.

Appraisal Costs

If using projected rental income, you must hire a licensed appraiser to assess the property and produce a detailed report showing the estimated rent.

Enlisting an appraiser and performing a rent appraisal costs money. The additional expenses can increase the closing costs, making the loan more expensive than anticipated.

Strict Guidelines

Most lenders have strict guidelines for calculating rental income from multifamily properties.

After all, most prefer to issue loans for single-family homes rather than multi-unit properties. Failure to adhere to these guidelines can dent your pre-approval chances.

Final Thoughts

Buying a multi-unit property with a VA loan can be an attractive investment opportunity for any homebuyer. However, VA loans are typically not for investment properties.

The good news is that you can legally work around this restriction to buy a multifamily home in Florida with a VA loan. You only need to live in one of the units as your primary residence and rent out the rest.

If you find good tenants, they can help you pay the mortgage. The only issue is that qualifying for a VA loan for a multifamily home using the projected rental income can be tricky. You require six months of cash reserves for the principal, interest, tax, and insurance.

Besides, you need two years of landlord experience or enlist a professional management company. If you want to avoid all these obstacles, your goal should be to qualify for the loan with your personal income.

Contact a credible lender today and get pre-approved for a VA loan to finance your multifamily home in Florida.