Homes Hard to Finance: Reasons Why a Home May Be Unmortgageable

While uncommon, some sellers may list a property as unmortgageable or “cash only.”

By law, the seller must disclose any material defects or features that could impact a sale. However, this document doesn’t typically come out until going under contract. If you have little information, here are the basics of why a house may not qualify for financing.

Condition Issues

Homes with major condition issues, such as those that impact property’s safety, structural integrity, or livability, often don’t qualify for conventional financing.

Like government-backed options like VA and FHA loans, Fannie Mae’s rules for conventional loans require the property to be safe, sound and structurally secure.

If you’re forgoing traditional financing and bringing a cash offer to a home with condition issues, keep the following in mind:

1. Structural Issues: Major structural problems are a significant concern. Structural issues include problems with the foundation, load-bearing walls, or roof. Signs of structural damage might consist of large cracks in the walls or foundation, uneven floors, and doors or windows that don’t close properly.
2. Roof Problems: A roof in poor condition can lead to leaks, water damage, and mold. If the roof is old, missing tiles or shingles, or visibly sagging, it might need extensive repairs or replacement.
3. Plumbing and Electrical Systems: Outdated or malfunctioning plumbing and electrical systems not only make a home uncomfortable but can also be dangerous. Look for old piping materials, frequent plumbing leaks, outdated electrical panels, and inadequate wiring.
4. Mold and Water Damage: Mold or extensive water damage can indicate serious underlying issues, such as leaks or poor ventilation. According to This Old House, whole-house mold remediation can range between $10,000 and $30,000. 
5. HVAC Issues: Inoperative or outdated heating, ventilation, and air conditioning systems can be costly to repair or replace and can affect the home’s habitability, especially in extreme weather conditions.
6. Pest Infestations: Evidence of pests like termites, rodents, or other infestations can signal significant problems. Termites, in particular, can cause structural damage if left untreated.
7. Hazardous Materials: Older homes may contain hazardous materials like asbestos or lead-based paint. Removal of these materials can be expensive and requires professional handling.

Rectifying issues of a home that is unmortgageable due to condition issues can cost tens of thousands of dollars if not more. Be sure to get a professional home inspection and price out all major repairs to make the home livable.

An Overbuilt Home

If you’ve ever spent a weekend house-hunting, you’ve probably come across this house: It is built with top-of-the-line materials and looks out of place in the neighborhood. It’s too big, in excellent condition and is too unique for the area.

One problem with these homes is that comparables from other homes sold in the neighborhood won’t match up, leaving the overbuilt home not worth as much as the builder put into it, says Gloria Shulman, founder of Centek Capital Group, a mortgage banker in Beverly Hills. The home won’t appraise as high.

Home appraisers may go outside the neighborhood to find nearby comparables. However, the home may become unfinanceable without a large down payment making up the difference of the appraised value if there aren’t similar comparables.

Unpermitted work

Unpermitted “improvements” on a property can lead appraisers to estimate a home’s value based on recorded square footage from the county. Such work can be a deal-killer with FHA loans, Shulman says.

“Lenders don’t loan on code violations,” she says.

A typical example is a garage where a bathroom gets bootlegged in or a garage turned into a bedroom. Building codes require access to garages for health and safety reasons, so if a garage is closed and turned into a bedroom, a door must exist so people can get out. Or, leave the original garage opening so that a new owner can reconfigure it and use it as a garage again.

There isn’t much of a fix to unpermitted work other than to get the issue fixed and ask the owner for a written list of improvements with permits.

Unfinished Construction

Buying a home with unfinished construction presents a unique set of considerations that most lenders avoid. With conventional and government-backed options, the home must be ready to occupy or a lender won’t finance it. 

Homes under construction require a different type of financing, such as construction loans or bridge loans, which present a unique set of requirements.

Mother-in-Law Homes

Properties with multiple homes, such as mother-in-law homes, can be difficult to finance. The first issue is that these homes are very difficult to appraise, as comparables often don’t exist.

Another issue is that lenders can’t repackage these loans on the secondary mortgage market, so they typically avoid them altogether.

Final Thoughts

Various factors can render a home unmortgageable, typically resulting in a sale that requires cash payment or creative financing. Prospective buyers need to be vigilant about these issues, as they affect the immediate feasibility of financing and have long-term implications on the property’s resale value.