March 21, 2017
How are FHA home loans affected by zoning laws? A reader asked a question about this in our comments section recently: “I have a family who wants to purchase a home on commercial zoned property. The County has given a letter stating that they would allow the rebuilding of the residence as long as less than 75% was damaged in a disaster. The lenders are refusing to allow an FHA residential loan for the property. It is clearly residential use in commercial zoning. Whey would they refuse to abide by the rules you state?”
This question is in reference to a 2011 blog post titled, “Can I Get An FHA Loan For A Commercial Property?” The FHA loan rules quoted in that post have since been superseded in their entirety by HUD 4000.1, though some rules may have transferred more or less intact.
That said, anytime you encounter older FHA loan information that references HUD 4155.1 or other rulebooks, it’s best to double check your information with the current requirements as listed in HUD 4000.1. The older references are obsolete.
As far as the reader question goes, the issue here may have much to do with lender standards and/or state law or local code compliance. FHA loan rules in HUD 4000.1 state of mixed use properties:
“The non-residential portion of the total floor area may not exceed 49 percent. Any non-residential use of the Property must be subordinate to its residential use, character and appearance. Non-residential use may not impair the residential character or marketability of the Property. The non-residential use of the Property must be legally permitted and conform to current zoning requirements.”
The reader question implies that the property meets the above criteria, being an actual residence in spite of the zoning. HUD 4000.1 adds:
“The Appraiser must determine if current use complies with zoning ordinances. If the existing Property does not comply with all of the current zoning ordinances but is accepted by the local zoning authority, the Appraiser must report the Property as ‘Legal Non-Conforming’ and provide a brief explanation. The Appraiser must analyze and report any adverse effect that the non-conforming use has on the Propertys value and marketability, and state whether the Property may be legally rebuilt if destroyed.”
The reader question doesn’t address the “legal non-conforming” issue mentioned above. Is it possible the appraisal resulted in a legal nonconforming declaration that the lender wasn’t happy with?
That is the crux of the issue-for FHA home loans, the FHA rule book is not only set of rules which apply to your transaction. State law, zoning requirements, building code, and lender standards would all have a potential say in whether such a loan was approved or denied.
So borrowers, agents, and sellers alike should know that while FHA home loans have FHA guidelines which have an important part to play in loan approval, they are not the sole guidance or set of regulations which must be heeded. Speak to a loan officer to learn more about non-FHA rules and regulations that may affect your transaction.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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