How Will Lender Handle San Francisco In-Law Apartment

What exactly does Fannie Mae say about in-law apartments?

When considering a property with an in-law apartment, Fannie Mae will buy the loan when secured against a one- or two-unit property as long as the following conditions are met:

• The use of the in-law apartment conforms to the subject neighborhood and to the market.
• The property is appraised according to its current use.
• The borrower qualifies for the mortgage without consideration of any potential rental income coming from the in-law apartment.
• The appraisal must report that the in-law apartment represents an illegal use.
• The appraisal report must demonstrate that the in-law apartment is typical for the market through an analysis of at least three comparable properties that have the same illegal use.
• The lender ensures that the existence of the additional in-law apartment will not jeopardize any future hazard insurance claim that might need to be filed for the property.

What do local appraisers have to say?

Lenders take properties with an in-law apartment on a case-by-case basis, and there must be emphasis on the three comparable properties with similar characteristics. Lenders almost always want such apartments to be treated as finished storage. The biggest hurdle is an in-law apartment with a kitchen—and more importantly, an in-law apartment with a gas range.

What does this mean for the realtor?

Buyer’s agents should let the loan agent working with the buyer know about looking at properties with any unpermitted spaces so that the loan agent can run it by their lender representatives.

Listing agents, when reviewing offers, should contact the loan agents named on the pre-approval letters to be sure they are aware of any potential problems relating to the property. They should provide comps with similar characteristics to the appraiser.