Conventional Loan for Home with Commercial Zoning?

Question

Hi,

I am selling a single family home that the city rezoned years ago into a commercial zoning. We have an offer on the property but my agent just stated that the buyer is wanting to use a conventional loan and she is pretty sure than Fannie Mae and Freddie Mac will not loan on properties with commercial zoning. Im not sure if it will change anything with a lender but the City can/will issue a letter stating that the property is grandfathered in as residential but does have commercial zoning (if the house burnt down, you could still rebuild a house with the same footprint).

Does anyone know if this is correct and if so, is there anyway a buyer can still use conventional financing? The buyers want to use the home as their personal residence.

Stephan L Schnaiter · Answer

The fact that it is zoned commercial is not a deal-killer by itself, if, as you say, it is grandfathered and could be rebuilt as a residential property. However, the appraiser must comment on any adverse effect the non-conforming use has on value, and whether the present use represents the highest and best use of the property.  That is for Freddie Mac (see below).  I think Fannie Mae is the same, but didn't look it up. https://guide.freddiemac.com/app/guide/section/5605.4

Patrick Roberts · Answer

I could be wrong about this, but I remember it coming down to the determination of highest and best use by the appraiser. I had a deal similar to this last year where a borrower wanted to buy a property that was zoned commercial but was effectively a SFR on the edge of a neighborhood that was slowly being rezoned. There were dissenting opinions about it with the underwriter and the risk team, and ultimately we didnt move forward. It's a gray area if I remember correctly. It has a lot to do with the attributes of the property and the area as well.

I think the bigger question is whether the lender will be willing to risk a buyback by funding the loan. This is one of the occasions where the lender's internal policies will absolutely matter. 9 out of 10 lenders may get a NO decision from the risk team, but then 1 will be ok with rolling the dice and risking having to eat the loan if they get hit with a buyback post-sale.

Fannie has a service desk that the lender can call for guidance. That being said, I'd probably try this loan at a local bank that can offer a portfolio option so that they arent as concerned with a buyback.