Sounds like you are getting hit with a lender who has overlays and possibly miscommunication between the loan officer/processor to the underwriter.

In the program, it appears that you offer a Pre-Loan Application-- perhaps this is how the program is legal?

House Hacking using the VA loan to live on one side while renting the other is great.2.

FHA loans didn't contain DOS clauses until 1989, VA loans 1988.  

So the though Hey I have an 800 fico and I should get a loan does not work.

@Hank Bank BRRRR is probably want you want to do.Buy, Renovate, Rent, Refi, Repeat.Before you go all in and either find out you don't like being a landlord or you make costly mistakes, start with just the next one.You'll have some challenges with tapping the equity in the townhouse:1) What loan amount can you qualify with your credit & income?

The only way to pay down a loan, is to pay down a loan.

They will go up to 100% loan to value or LTV (or used to). 

They finally get back to me after the close date to say they need more time because they are try to cross collateralize their other properties to make this deal happen and the bank they were using doesn't do this kind of loan. 

I see little benefit in the FHA as an option as long as the 5% conventional loans are available now.