illegal 3rd unit, FHA financing

4 Replies

hi BP! I've been on the hunt for my first house hack purchase. Ive found a great 2 unit property that has 3rd unit that was built without registering it with the city, so technicallly illegal. I will be using FHA financing and my mortgage broker said that this illegal unit could cause issue during the appraisal and potentially not allow me to purchase the house with third unit.

Has anybody dealt with this situation? My mortgage broker said that the main problem is the kitchen and that if the power to the stove was cut off and literally plastered back into the wall it wouldn't be an issue. Would appreciate any other feedback from other peoples experience. Thank you!

Hi Rebecca,

Unfortunately this is a very complex situation and no one will be able to give you a straight forward, black and white answer without knowing a lot more specifics. 

The short answer is, it is going to be extremely difficult, almost impossible, to get FHA financing on this property. Simply removing the stove and plastering the hole won't necessarily make it a financeable property.

You'll need to decide if you want to jump through all of the hoops and pay for an appraisal for a long shot like this. If you decide to just be prepared for a bumpy road.

Best of luck!


If it was built without permits then it would make the unit unpermitted. It would be illegal if the zoning only allows up to two units and you have a three unit multi family. You should find out what is the zoning for the property. Is the third unit an addition, or was it converted within the original structure?

From what I have read around the BP traps, it shouldn't be a problem as long as you are only expecting appraisal and funding for its value as a duplex. Technically, that thingy with the stove may well be enough so that for ALL intents and purposes, it is a DUPLEX. Do the numbers still work? If not, you know what to do. [No legal advice given]. Cheers...

thank you for all the feedback everybody. The area is known for multi families. I'm not 100% sure what the zoning is specifically, but I'm confident that this property being converted into a 3 family would not be a problem. The problem is that it wasn't done with the supervison of the city. To be honest, at this moment I do not need a third unit, but the additional bedrooms and bathroom would be a great addition. But I wouldn't rent out the property until its properly registered with the city. I want to be able to purchase the property first!!

The numbers work well with just the duplex because one unit is already rented out with a higher end rental rate. So with one unit rented out and the 2nd unit, its a sound investment. So the 3rd unit is a huge bonus. I'm more concerned with getting the property financed. 

The third unit is in the basement. So the unfinished basement is now finished, except for a small part of the basement where the water heaters and meters are. So no additions were built. Walls were just put up for bedrooms (which could be storage rooms honestly) and then a bathroom and kitchen were put in place.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here