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  • Daniel Dobbs (Mutual Home Mortgage)


Rules for Appraising Conversions

All of the following conditions are required to allow a garage conversion without permits for all financing:

  • If a garage was converted without a permit, the appraiser must show the value as a garage, not a converted room. The appraiser must also estimate the cost to cure for re-conversion back to a garage.

  • If the garage is converted to living space with no extra plumbing or electrical work, no permit is required if the appraiser indicates it was completed in a “workmanlike manner,” AND the comparables support the value, AND local ordinances do not prohibit the lack of car storage.

  • If the appraiser can obtain comparables that are the same as the non-permitted living space, no adjustment to the property value is necessary.

  • If the comparables do not have a similar living space, the room must be valued based on its original use.

This requirement applies to family rooms and patio enclosures as well.

However, if the above requirements for garage conversions are not met, permits ARE required unless the loan meets the unpermitted addition requirements as listed in the Lending Product Profile.

Additionally, if permits are specifically required by the purchase agreement, contract, etc., for the conversion, they must be provided.

Rules for Appraising Unpermitted Additions

The subject addition complies with all lending guidelines

  • The quality of the work is described in the appraisal and deemed acceptable ("workmanlike quality") by the appraiser.

  • The addition doesn't result in a change in the number of units comprising the subject property (e.g. a 1 unit converted into a 2 unit - regardless of how the appraiser classifies the property with the addition, improvement, or conversion).

  • If the appraiser gives the un-permitted addition value, the appraiser must be able to demonstrate market acceptance by the use of comparable sales with similar additions and state the following in the appraisal.

  • If Non-Permitted additions are typical for the market area and a typical buyer would consider the "un-permitted" additional square footage to be part of the overall square footage of the property.

  • The appraiser has no reason to believe the addition would not pass inspection for a permit.

Editor's Note: Although Fannie / VA and FHA allow conversions, many lenders with "overlays" will not lend on these properties.

"Overlays" are additional lending guidelines that lenders require to satisfy their underwriters and Wall Street investors!

Typically "depositories" (credit unions and banks) as well as so-called "direct lenders" are the type of lenders who have overlays and WILL NOT LEND on conversions!

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