Loan stalled due to functional obsolescence

[JenniferSanDiego]

The appraiser has returned the following status on the property we are trying to get a loan on:

Upon further research the appraiser discovered that this property is located in R1 zoning. The property is a permitted duplex with separate meters. Appraiser has verified with the city and if rebuilt can only be rebuilt as an SFR. Please how to proceed as this presents a functional obsolescence.

The lender is saying that Fannie Mae will reject the property due to functional obsolescence, and the property is "unloanable". The research I have found (partly through this board) is that the appraiser is supposed to note that the value is lowered due to this, and it can still be approved for a loan. We are putting a 40% down payment on the investment property, so that part shouldn't be an issue. In addition, the San Diego ordinance specifies: "A variance may be obtained in some cases if a property owner wants to build something not allowed in the property's zone." I can't get a response from the loan agent for a week, and this is driving me nuts. Will this property be rejected by Fannie Mae?

 

[Meandering]

If you lender is not returning your calls, it does not matter what Fannie wants or not, because you have no way to borrow money from Fannie. Your best bet in my opinion is to approach a local bank, discuss the issue with them and see if they will lend on the property.

All of this is a lender's decision, and you can't force them to loan you money, regardless to whatever reasons you qualify to borrow money.


.

 

[Proactive]

By your posting I am assuming the appraiser researched the property, notified the lender, and the lender cancelled the appraisal assignment. Although I disagree that this is a functional obsolescence issue, the appraiser appears to have properly performed their due diligence.

I don't have the official "Fannie Mae" answer, but have experienced a similar circumstance in the past, when a lender faced with a non-conforming property declined the loan as they could not obtain a "rebuild letter" from the building jurisdiction.

Although you may be putting a sizable down payment on the property, I imagine it will still be an issue with most lenders. If your loan agent is incommunicado for a week, and no other loan staff will help you, I don't see how you can be faulted by asking their competition. You are, after all, in the middle of a pending sale.

You might also pose your question at a forum where more lending agents hang out; Activerain and BrokerOutpost are two that come to mind.

Good luck!

 

[gregb]

State law may trump local ordinances:

[url]http://codes.lp.findlaw.com/cacode/GOV/1/7/d1/4/2/s65852.25[/URL]

 

[Restrain]

If the property cannot be rebuilt, most lenders will reject the loan, especially national lenders. I agree that a CU or local small bank would be the most probable lender.

 

[George Hatch]

The value of the property might not be lower due to a legal non-conforming status of the structure. There are a number of neighborhoods in SD that have been downzoned and its possible that some or all of the comparables in the appraisal have the same "problem".

The appraiser identified a situation and reported it. How the lender handles that information is up to them. Different lenders react differently to these situations.

 

[Randolph Kinney]

From Fannie Mae Selling Guide April 9, 2013:

Part B, Origination Through Closing
Subpart 4, Underwriting Property
Chapter 1, Appraisal Guidelines, Appraisal Report Assessment

page 581

B4-1.4-06, Appraisal Report Review: Subject Property Zoning (12/01/2010)

Permissible Use of Land

Fannie Mae does not purchase or securitize mortgage loans on properties if the improvements do not constitute a legally permissible use of the land.

Certain exceptions to this policy are made provided the property is appraised and underwritten in accordance with the special requirements imposed as a condition to agreeing to make the exception.

Property Type - A property that represents a legal, but non-conforming, use of the land and the appraisal analysis reflects any adverse effect that the non-conforming use has on the value and marketability of the property.

Loan Eligible for Purchase or Securitization by Fannie Mae? - Yes, if the mortgage is secured by a one- to four-unit property or a unit in a PUD project.

 

[Randolph Kinney]

Non-Conforming Uses – A Source of Affordable Housing

http://www.huduser.org/rbc/newsletter/Volume3Iss4Print.html

San Diego approaches the reconstruction of nonconforming uses differently. The City defines these types of uses as “previously conforming uses” not “nonconforming uses”. Under these circumstances, the City allows the reconstruction of previously conforming residential uses subject only to the review process required for conforming structures. Restoration of nonresidential previously conforming structures face much stricter regulation.

 

[Terrel L. Shields]

The lender has made the decision that they do not want to try and get this past underwriting...so it's a lender issue, not an appraiser issue.

 

[rbrienza]

Different bank different appraiser. Sometime the best bank for you is a local bank and not a big bank like Bank of America, Wells Fargo. Try Bank of Coronado, Island federal Credit Union, North County Bank, Union Bank, Cali Bank and Trust, Home bank. just to name a few.

(I use to live in Coronado, My parents still live there).

Good luck
ray