Realtors in San Francisco usually describe them as bonus rooms, but unwarranted or illegal in-law units aren’t viewed as being a bonus by lenders these days! Fannie Mae has underwriting guidelines to deal with bonus rooms or in-law units, so if the property you are interested in can meet the following guidelines you should be able to get financing:
Fannie will buy the loan when secured against a one or two unit property as long as the following conditions are met:
– The illegal use conforms to the subject neighborhood and to the market.
– The property is appraised based upon its current use.
– The borrower qualifies for the mortgage without consideration of any rental income coming from the illegal unit.
– The appraisal must report that the improvements represent an illegal use.
– The appraisal report must demonstrate that the improvements are 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 illegal additional unit will not jeopardize any future hazard insurance claim that might need to be filed for the property.
One of the most important things you can do, as a buyer in San Francisco, is to make sure that your mortgage professional is aware of the bonus rooms before you make an offer on the home. It might seem like a minor detail to you, but it is incredibly important that your mortgage professional have a chance to run the particular property by their lending team in advance. It will save you the grief and expense of making an offer and inspecting a property that your lender will not lend on because of the unwarranted rooms.
Local appraisers report that the biggest challenges come in financing in-law units with illegal kitchen installations, and in particular in in-law units with gas ranges.