Accompanying the more flexible qualifying guidelines for borrowers is a greater scrutiny of the real property used as the lender’s collateral for the loan. Investors have become much stricter when examining preliminary title reports, reviewing zoning requirements and generally considering the property that will secure their loan. In the past, if the Loan-to-Value (LTV) was sufficiently low, lenders were more flexible. This is no longer the case.
One of the more confusing issues today is the distinction between a Mother-in-Law unit and a secondary unit.
Mother-in Law Unit: By definition, this is an accessory dwelling designed to accommodate a member of the family (or guest), often without a kitchen facility. When a kitchen capacity is included, lenders can become concerned that the real intent of the dwelling is for rental purposes. Generally, the property will be zoned single family residential which also limits any accessory building to be of a non-rental type. Confusion occurs when the Mother-in-Law unit is separately metered. Lenders sometimes then want to consider it a secondary facility and require multiple unit loan pricing, with its accompanying higher interest rate vs its single family residential designation. While in this latter circumstance, rental income might be considered, in most cases, there would be no rental income component from a mother-in-law unit when applying for a loan.
Secondary Unit: In most cases, this designation is reserved for a facility on a lot zoned for multiple units, often separately metered and clearly designed to be a rental. Loan pricing will be higher based upon multiple unit pricing requirements. Rental income is usually accepted as a factor in the loan process and the calculation of qualifying ratios.
Having said the above, this arena remains confusing and unpredictable. Neither the appraisal nor zoning can always be relied upon to settle the issue. Caution must be exercised when determining if a unit’s rent will be allowed in the qualifying ratios, whether the facility will be defined by a lender as being a Mother-in-Law or Secondary unit or if a lender will ultimately determine the unit to have “no value” for their loan purpose.
While we all prefer clear answers in these situations, the lending climate today lends itself to uncertainty. Realtors and mortgage representatives should proceed cautiously with any assertions to prospective borrowers about accessory units. When in doubt, check with your lender as soon as possible to seek clarification.