Mother-in-Law or Secondary Unit – What’s
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.