The FHA Single Family Home Loan Rulebook, HUD 4000.1, includes instructions regarding FHA appraisal procedures. There are rules governing a wide range of issues, conditions, and problems, but FHA appraisal rules don’t address each and every issue. Some areas are left to state/local building code, federal health guidelines, or other regulations.
Other issues are clearly defined in the appraisal section and are non-negotiable (with certain exceptions that may apply) except where the law (local, state, or federal) may have a say.
Some of these clearly defined areas include zoning and the non-residential use of a property to be purchased with an FHA mortgage. HUD 4000.1 has some specific things to say about both.
When it comes to the non-residential nature or use of the property, FHA appraisal rules are clear that a structure to be purchased with an FHA single family mortgage must be a home first, and all other uses must be subordinate to that residential use. That’s up to and including the actual percentage of the property that is taken up by non-residential use.
Page 471 of HUD 4000.1 states, “The non-residential portion of the total floor area may not exceed 49 percent.”
Furthermore, Page 471 adds that any non-residential use of the home cannot “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.”
State or local laws may also have a say in this area, so it’s best to ask a real estate expert or a real estate lawyer in your area what may be, in her or his experience, applicable in a given situation.
When it comes to zoning, the property must meet applicable state/local ordinances. Additionally, HUD 4000.1 states, “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.”
Speak to a lender if you aren’t sure how these rules may apply to your transaction.