Refinance on single family house with MIL unit

7 Replies

I'm currently in a refinance road block.  I rent out my single family house to 2 tenants since it has a MIL setup.  However, the appraiser have a note that said zoning law prevent my home to be rented to multiple tenants/families.  Therefore, the lender underwriter team is hesitant to approve the loan.  I have no idea of such law.  Anyone encounter this situation before?  Any suggestion to move this loan forward? 

Originally posted by @Jacky Fan :

I'm currently in a refinance road block.  I rent out my single family house to 2 tenants since it has a MIL setup.  However, the appraiser have a note that said zoning law prevent my home to be rented to multiple tenants/families.  Therefore, the lender underwriter team is hesitant to approve the loan.  I have no idea of such law.  Anyone encounter this situation before?  Any suggestion to move this loan forward? 

 It depends on the locations, but in many areas you can't just convert single family to multifamily. There are many reasons for this. I am going to guess you purchased it as a single family home, whether you or someone else added the MIL suite, it is not a legal unit based on what they are saying. Probably your best bet is to contact the city or county and see about getting it rezoned.

Hi Jacky,

This is a pretty common scenario you're in.  Especially in our BP world of "house-hacking."  Quick definitions:

- Mother-in-law: simply means the basement of a home has a kitchen, separate entrance, and a dividing door or something like that

- Accessory Dwelling Unit: means the city has approved the ability of the owner-occupant to rent out a portion of their home. "ADU" legality is typically defined by each city individually. If they are allowed, they typically require a business license or something like that

- Duplex or Multiunit: means the property is zoned and legally permitted to have multiple families living in the same structor and does not require an owner-occupant 

It sounds like your home with the MIL will need city approval to be a legal ADU or a zoning change to become a legal duplex. It's rare that a city will change the zoning for a single family to be multi-family but I don't know the specifics of the Washington market. I've heard they're become really lenient on ADU and multifamily so you might be in luck!

My recommendation would be to go to your county website and look at the zoning and try to make a game plan from there.  It's unlikely you'll have a quick solution for the duplex-like income unfortunately but you could always convert the rental into a single family unit and rent out the whole thing as a quick solution.  

Good luck!

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It's getting pretty common.  Seattle recently removed the owner occupant requirement for single family homes with ADUs (AKA-MILs). I believe Richland still technically requires that an owner live in one unit or the other. While there sometimes isn't much strict enforcement of the rules by the city (like imposing fines, or forcing you to comply), I'm not surprised that a lender wouldn't be willing to count the income from a rental unit that isn't technically allowed.  I think in order to use the full rent as qualifying income towards a refinance, you would either need to have a single lease for the whole house. 

@Jacky Fan

Does anyone else think this is a nitpicking appraiser? I’ve had no significant issues with three unpermitted ADUs getting appraised and financed. Though I am investing in an area of california where there is a good amount of unpermitted work on homes. Perhaps give it another shot with a different lender/appraiser?

Agree, it maybe the appraiser.   This is the 2nd refi at the property and no issue the previous time.  I guess it raised a red flag when I told him to enter downstairs through the side door.  Anyways, lesson learned and I'm better prepared next time.