JVM Lending Blog

Rates Up; Unpermitted/Illegal In-Law Units; Baths; Kitchens – When Are They OK?

30 Year Fixed Rate Loan at a Cost of One Point: 3.875%*

Rates increased today again primarily because of a positive unemployment report. Unemployment decreased to 8.6%, its lowest level since 2009.

Every week we get transactions involving illegal bedrooms, bathrooms, in-law units, cottages or kitchens (often part of an in-law or cottage).

Illegal/unpermitted bedrooms are never an issue, as long as appraisers do not count them in the gross living area and give no value to them. Likewise, unpermitted bathrooms are usually treated similarly.

It is the unpermitted kitchens that give us a problem, as most lenders do not allow them.

The key for unpermitted bedroom/bathroom units is that the appraiser states that such additions are “typical for the area” and that the unpermitted space is “built in a workmanlike manner”.

For an unpermitted in-law unit with a kitchen, we have a lender that will allow it to stand as long as: (1) No value is attributed to it; (2) It is deemed “typical for the area”; (3) It was built in a workmanlike manner; and (4) Comparable sales with in-law units are provided.

If those four criteria are met it seems we can push almost any addition through underwriting, even for FHA loans.

*The above rate quote has the following assumptions: $400,000 Loan Amount; 20% down payment; credit score above 740; property is SFR; borrower has sufficient income to qualify; APR is approximately 0.20% higher than quoted rate for a $400,000 loan. Estimated closing costs affecting the APR include $4,595 for Origination and Processing Fees, $850 for other Lender Fees; $1,400 for Escrow Fees, and $1,000 for Prepaid Interest.

Call Jay Voorhees or Heejin Kim at (925) 855-4491

Real Estate Broker, CA Bureau of Real Estate, BRE# 01524255, NMLS# 335646