Veterans and service members who want to purchase multiunit properties often see it as an investment opportunity. For many people, there’s something appealing about the idea of having tenants help pay some or even all of the mortgage.
The good news is you can absolutely look to buy a duplex, a triplex or a four-plex using your VA home loan benefits. But there are a few key considerations to understand at the outset when it comes to multiunit properties.
Multiunit Property Occupancy
The first major consideration is occupancy.
Veterans and active military members purchasing multiunit properties still need to meet the VA’s occupancy guidelines. These loans are for purchasing primary residences that borrowers intend to live in full time.
VA buyers will need to intend to occupy one of the property’s units. You wouldn’t be able to use a VA loan to purchase a multiunit solely as an investment property.
The occupancy guidelines are part of why you can't use a VA loan to purchase commercial properties. This loan program is focused on helping Veterans purchase homes they live in full time.
You can't use your home loan benefit as what's essentially a commercial loan. So buying properties whose highest and best use is non-residential in nature isn't going to work. But, again, it is possible to purchase a residential property with your VA loan benefit, reside in one of the units and look to rent out the others.
Counting Rental Income
The second big issue is rental income. Generally, the thought is something like this: You’re going to buy a duplex, either inherit tenants or quickly land some and then have them pay most or all of your mortgage every month.
And that’s a nice thought, because if you can get a lender to count this future rental income, that basically makes it easier to qualify for the loan.
For example, if you’re looking at a multiunit property that carries a $2,000-a-month mortgage payment, being able to count $1,000 a month in rental income means you only have to qualify for a $1,000-a-month payment.
The problem is you might not be able to factor that projected rental income into the equation when it comes to qualifying for the loan. Policies and guidelines on this can vary by lender.
Veterans United Guidelines
Here at Veterans United, we wouldn’t consider future rental income as effective income toward a mortgage unless you have a track record as a landlord. Typically, we would need to see documents showing a recent two-year history as a landlord or property manager.
There is an exception to the two-year requirement, although it isn’t a common occurrence: Basically, if you’re working with a property management company that guarantees you get paid even if you don’t have tenants, we may be able to count that income.
In addition to the two-year history, you’ll also need renters locked into a lease.
In terms of calculating the projected rental income, Veterans United currently uses the lesser of 75 percent of verified prior rent collected on the units or the appraiser’s opinion of the property’s fair market rent. VA buyers purchasing properties without existing tenants would need to have leases in place at closing.
Borrowers who qualify and want to count future rental income will also need six months’ worth of cash reserves in the bank -- that’s six months’ of full mortgage payments, including taxes, insurance and any homeowners association dues.
Generally, you won’t need cash reserves for a multiunit property unless you’re wanting to count that rental income.
Every homebuyer’s situation is different, especially when it comes to purchasing multiunit properties.
Talk with a Veterans United loan specialist at 855-259-6455 for a closer look at your specific scenario.