Duplex vs. House + In-Law Unit

    Underwriter Kills Deal By Calling In-Law Unit Property A Duplex

    A few months ago, we had a purchase with two units on one lot.

    It had two addresses and two electrical meters, and our underwriter insisted it was a duplex – effectively killing our deal.

    So, we called Fannie Mae and explained all the particulars and Fannie overruled our underwriter.

    Our underwriter justifiably thought it was a duplex because of the two addresses and two meters – but those factors are not dispositive.

    The key factor, per Fannie Mae, was the zoning and the legality of the improvements (the unit was built with permits).

    Interestingly it was the zoning (R1 or Single-Family Residence) that almost killed the deal but it was the zoning that also ended up saving it.

    If the property was a duplex, it would have been an illegal use (“nonconforming”) and not eligible for Fannie Mae financing.

    But, because the property was zoned for one unit and built with permits, Fannie Mae declared it kosher for lending.

    In any case, we get questions all the time asking whether properties are duplexes or single-family residences with in-law units.

    Below are the criteria that underwriters and appraisers evaluate. And unfortunately – there are no hard and fast rules.

    I should add that this is extremely important for both financing and valuation purposes, and I encourage readers to read this blog too: Valuing An In-Law Unit.

    Duplex Vs. Single-Family Residence (SFR) + In-Law – Criteria

    Two Separate Units

    This is somewhat obvious, but if the units have “interior access” from each others’ living areas, the property will often be deemed a single-family residence – with the square footage of both properties combined as one primary dwelling.

    Legal Zoning

    This is the most significant factor that both appraisers and underwriters will focus on. For a duplex to be “legal,” the zoning needs to clearly state that two units are allowed. If it is ambiguous at all, borrowers will need to get a “re-build letter” from the city or zoning authority that states that two units can be re-built in the event of a fire or other disaster that destroys the units. With respect to SFRs and in-laws, zoning authorities have become much more flexible with their willingness to permit extra units since the COVID crisis. Borrowers with in-law units will also sometimes be required to get “re-build letters.”


    If one of the units was not built with permits, the property will be an SFR with an illegal unit (making financing difficult no matter what, but not impossible, as I discuss in the blog linked above, e.g. if the unpermitted units are common in the area).

    Separate Addresses and Meters

    I am not sure about Fannie Mae’s exact guidelines, but we have closed transactions where the duplex had only one street address (with units “A” and “B”) and one electrical meter. And similarly, we have closed transactions where the SFR and in-law unit have separate addresses and meters, as I mention in the first paragraph of this blog. So, this too is not a deciding factor.

    Detached or Attached

    Duplexes and SFR/in-law properties can be either.

    Highest and Best Use

    This is something the appraiser considers relative to the market and the neighborhood. There are areas (more urban usually) where duplexes are worth more than homes with in-laws and vice versa (more suburban usually). We once had a transaction where we wanted the property to be deemed an SFR/in-law unit because we wanted superior jumbo financing. The appraiser, however, declared the property a duplex, as that was its “highest and best use.” This pushed us into “conforming” (Fannie Mae) loan territory because the loan limits are larger for duplexes than they are for SFRs, and that made our financing options worse.


    In summary, the biggest factors are going to be legality (zoning and permits) and the highest and best use (as deemed by the appraiser). And unfortunately, the duplex vs. SFR/in-law distinction is not always entirely clear until both the appraiser and the underwriter weigh in.

    Agents asking their lenders for guidance should provide the zoning and permit information, old appraisals if available, and as much info about the property as possible.

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