This topic comes up a decent amount here in Chicago because of the amount of grandfathered in "non-conforming" units.

The first property that I bought was 2 legal units and a non legal conforming basement unit with adequate ceiling height and 2 forms of egress.  

In this scenario, you have to make sure the house conforms to VA guidelines in regards to its condition when you purchase. 

She has conformation the mold is a bad one, and you can smell something is not right...Maybe  the toxic mold has her in the hospital or worse???

With Fannie Mae and the other conforming loan programs you still have to qualify to be approved and deemed you can afford the new purchase.

Some states may not fully recognize or conform to federal provisions.

Here are the Fannie Mae guidelines for legally non-conforming properties:If the Property's characteristics are legally non-conforming, you must:ensure the Borrower executes the Modifications to Multifamily Loan and Security Agreement (Legal Non-Conforming Status) (Form 6275);confirm whether, if fully or partially destroyed, the Property's Improvements can be fully rebuilt to the pre-casualty condition per current laws, zoning requirements, and building codes; and if the Property’s Improvements cannot be fully rebuilt to the pre-casualty condition, evaluate if the as-rebuilt Property will support the Mortgage Loan at the current Tier, and document your analysis in the Transaction Approval Memo.To assess the Borrower's ability to rebuild Improvements on a non-conforming Property to a level that will support the Mortgage Loan at the current Tier, you should consider: conducting a threshold analysis to determine the resulting actual amortizing DSCR if the reconstructed Improvements cannot be rebuilt as-is per current law; the likelihood of a casualty event (e.g., wind, earthquake, fire, flood, mine subsidence, etc.); the percentage of damage to the Improvements at which the Property’s jurisdiction will require the Property be rebuilt to current zoning and land use requirements (i.e., the destruction threshold); which Property characteristics the destruction threshold percentage applies to, such as market value, assessed value, replacement cost, or unit count; for Properties with multiple buildings, if the destruction threshold percentage applies to each building, or all buildings as a whole; the replacement cost to rebuild per current requirements for zoning, and land use; the Property’s continued marketability, and economic viability; the amount and type of Borrower-maintained insurance coverage required per Part II, Chapter 5: Property and Liability Insurance, Section 501.02C: Ordinance or Law Insurance; insurance loss proceeds payout, compared to increased rebuilding costs, including from building code changes, Americans with Disabilities Act compliance, and the municipality's local zoning requirements (e.g., green compliance for new buildings, etc.); the sufficiency of estimated insurance proceeds from ordinance or law insurance and other coverages to repay the Mortgage Loan in the event of partial or full casualty, or condemnation; and for a Tier 3 or Tier 4 Mortgage Loan, if requiring execution of the Limited Payment Guaranty (Form 6020.LPG) would mitigate the risk of the as-rebuilt Property not supporting a Tier 2 Mortgage Loan.

While this would improve the cashflow and cap rate for resale, I'm wondering if it would shrink my market of buyers, since they could no longer use conventional financing as it would no longer conform to a 2-4 unit building.

Hi Amber -Typically, DSCR loans require that the property be legally conforming to its current use.

On a conventional/conforming, there is a requirement with a number of regulations most notable TRID.