Problems Obtaining a Mortgage on a Duplex Due to Zoning Issues

6 Replies

I've recently had an offer excepted on a duplex in southeastern Michigan that I intended on starting my first house hack in after obtaining an FHA loan. The appraisal just came back and the underwriters refuse to approve the loan unless the property is converted to a single family home before closing.

Their reasoning is that since the property is located in a neighborhood zoned for single family homes, that if the home were to need to be rebuilt due to fire, flood, ect. that it would have to be rebuilt as a single family home.  The property is currently grandfathered in with legal but nonconforming use as 2 unit property.

Has anyone encountered a similar situation or know of any lenders who won't have an issue with this? 

@Robert Sexton Yes. This can be a problem. Your property is considered to be legal “non-conforming”. The loan is doable, even with financing from Fannie/Freddie, as long as the appraiser is willing to state the following in the appraisal:

1. This is typical in the area (other multi-units that have been revised to single family zoning).

2. The fact the property is legal/non-conforming does not negatively impact marketability (value/ability to sell)

Hopefully that makes sense.

@Robert Sexton I have some lenders that I use that where that should not be an issue.  What city is the duplex in?

Thanks for the quick responses guys. 

Jeff, that does make sense. 

Lance, it is in Wyandotte

Originally posted by @Robert Sexton :

Thanks for the quick responses guys. 

Jeff, that does make sense. 

Lance, it is in Wyandotte

 You could also go to the local zoning board and request a variance to make the lot officially a multi-family designation. Now, some zoning boards will shoot that down immediately, but some basically approve any request that comes across the table. Depends on the municipality.

Additional info:  In some communities, "grandfathered non-conforming" properties lose their status as legal if they are out of use as a rental for more than one year.  For instance, if one unit was not rented for three years, a community could say the non-conforming use is no longer valid and a variance must be obtained to continue renting that unit.  I've seen--even veteran real estate investors--have this happen to them...those that didn't do their due diligence.  I get calls from investors saying that they just rehabbed a 2, 4 or more unit property (spending $1,000's) and the city says it can only be used as a single family since the additional units are no longer legal non-conforming uses.  I've also seen this problem arise when the seller or previous owner reverted the property to an owner-occupied property for homestead tax treatment due to hardship.  Of course, the variance is always a possible solution, but it cost a chunk of change and is at the whim of the neighbors and politicians.  Due diligence is always king!

Thanks @Joshua Birk and @Clay Powell .  

The empty unit was vacated within the past few months so I don't foresee losing it's grandfathered in legal status as an issue, although I had no idea that that was a possibility and will definitely keep it in mind on future deals. 

A new mortgage broker that I'm working with is attempting to obtain a letter from the city that will allow the loan to go through without going through the process of a zoning change.  I should know if that works early next week.

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