From FNMA Selling Guide.
Section 203.01 – Manually Underwritten Mortgages
We have five different appraisal forms that can be used for manually underwritten mortgages, depending on either the type of property being appraised or the type of mortgage that is secured by the property. The appraiser must use our latest version of one of the following forms and include any other data-either as an attachment or addendum to the appraisal report form-needed to adequately support the opinion of market value:
• Uniform Residential Appraisal Report (Form 1004), for one-family properties and units in planned unit developments (including those that have an illegal second unit or accessory apartment that we will consider as acceptable security) that secure either first or second mortgages.
Form 1004 may also be used for two-family properties, if each of the units is occupied by one of the co-borrowers as his or her principal residence or if the value of the legal second unit is relatively insignificant in relation to the total value of the property (as might be the case for a basement unit or a unit over a garage). In addition, appraisals for units in condominium projects that consist solely of detached dwellings may be documented on Form 1004, if the appraiser includes an adequate description of the project and information about the owners' association fees and the quality of the project maintenance;
• Small Residential Income Property Appraisal Report (Form 1025), for
two- to four-family properties (including those that are located in PUD projects);
AND
Section 404.01 - Zoning
.........We will purchase or securitize a mortgage secured by a one family property that includes an illegal additional unit or accessory apartment (which may be referred to as a mother-in-law, mother daughter, or granny unit) as long as the illegal use conforms to the subject neighborhood and to the market. The property must be appraised in conformity with its legal use, that of a one-family property (and the borrower must qualify for the mortgage without considering any rental income from the illegal unit). The appraiser must report that the improvements represent an illegal use and 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 must also make sure 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. We will not purchase or securitize a mortgage secured by a two- to fourfamily property that includes an illegal accessory apartment.
Sooooo while it may be possible to put certain "2 unit" properties on the URAR 1004, I think your case is different. It sounds like the LO is "trying to pound a square peg into a round hole and you are the hammer" (unknown forum member quoted)
