FAQ: Homes with Non-Permitted Additions are Eligible for Conventional Financing

On Friday, the Bureau of Labor statistics will release its March employment report. As the economy sluggishly moves forward, the BLS report has become something of a primary barometer for the character and extent of the U.S. economic recovery.

Beyond the correlation between employment and economic strength, the monthly reports have also taken on added importance as a measuring stick for the Federal Reserve.  Over the past few years, markets have moved not only based on what the employment situation suggests about the economy, but also on what the employment situation suggests about possible Federal Reserve action (given the data).

The Fed helped juice the economy – and hold down mortgage rates – with its stimulus program quantitative easing, and has closely watched indicators (like employment) to decide when to scale things back. The “tapering” process has started and been three three straight reductions, even despite poor employment data in December and January.

We will update you on the full employment report next week. For now, we are going to post about a topic we have been hearing quite a bit about lately: non-permitted additions.

After the real estate bubble popped and the economy fell into recession, many homeowners decided against leaving their homes and “trading up” or investing in new property, and instead focused on improving what they already had.

As new home construction has declined over the past 5 to 7 years, residential additions and alterations have increased – and some of the work done hasn’t been permitted. What does this mean for current buyers and sellers? Will lenders accept non-permitted additions and alterations?

The broad answer is “yes”: lenders will accept properties with non-permitted additions and alterations, but there isn’t a single set of rules to follow for obtaining financing for such properties. What works for one loan, might not work for another.

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Monica Chudgar, an appraiser and realtor, gives an example. “I appraised a home that converted the garage to a second unit with a full bathroom and kitchen. The lender didn’t want the stove in there, so the owners removed the stove and took a picture. After that, the loan went through fine.”

The most important consideration that lenders take for non-permitted additions is the quality, or “workmanship”, of the completed project.

“There are liability and insurance issues,” said Daniel Podesto, co-owner of Central Coast Lending. “When a lender agrees that the property is in acceptable condition, they can be held responsible to some degree.”

Lenders want to make sure that they are financing a safe, fully-functioning property. This is where “workmanship” comes into play.

“The concern is about the quality of the improvement,” said Podesto. “Was the project done by a guy without experience? Or was the improvement completed the right way by somebody with skill?”… READ THE COMPLETE ARTICLE HERE.