Richard Montgomery ghns
Courtesy of Richard Montgomery
Richard Montgomery

Reader question: I purchased a home from a contractor. It was a carriage home that was a model for the developer. The home had an in-law suite over the garage. I obtained a standard mortgage to purchase the home, including an appraisal and title insurance. In 2011, I was going to refinance the home only to be told by the FHA mortgage appraiser that the in-law suite was not shown on the city records and was there illegally, so the refinance was refused. How do I pursue getting the developer I purchased the property from to fix it? Would this be covered with my title insurance or do I need to hire a lawyer to resolve the issue? Terry G.

Monty's answer: Hello, Terry, and thanks for your question. There are a number of possibilities here that require some investigatory steps on your part before deciding the best course of action to take. Doing the legwork may help contain potential costs.

The 5 possibilities

1. Call the contractor and explain to them what has happened. It is possible they may have a logical explanation and a copy of the permit or plans they submitted in their file. It may not have to go any further than the contractor to learn there is no issue, except to clear it up at city hall. It is also possible the contractor made a mistake, and it can be easily corrected. Obtaining a copy of their documents could be helpful in making the correction.

2. The appraiser could be mistaken. A separate permit may not have been required if the builder filed a plan with the municipality that included the in-law suite. Every municipality has different rules and regulations regarding permits.

3. The person that told the appraiser that a separate permit was required may have been mistaken. Regulations are sometimes long and complicated and can be misinterpreted. Which department (or departments) did the appraiser learn of the illegality? In some municipalities, the builder would take out a building permit in one department, have the occupancy permit granted by a different department and the assessment determined by a third department.

4. The fact the first appraiser did not point out any illegalities gives rise to the possibility some FHA underwriting requirements were misconstrued as being "illegal" instead of "not permitted" with the FHA loan.

5. If the “illegal” issue turns out to be a zoning issue because the in-law apartment is considered a second family in the zoning code, it is surprising the city granted an occupancy permit to you or the contractor. In this event, an approach to consider is to ask the city for a variance from the zoning code, as the city may have some culpability in creating the issue. Or ask the city if they will revisit the language in the code defining an in-law apartment. Lastly, perhaps the city would adopt an Accessory Dwelling Unit  (ADU) ordinance.