5 Homes That Can Be Hard to Mortgage

Written by
Kirk Haverkamp
Read Time: 4 minutes

In trying to get a mortgage when buying a home, there are some home problems that can be overcome by a handyman - leaking pipes, broken doors and water stains on walls, for example. If they can be fixed before the appraisal or they're not major, a bank will often approve a loan.

But some problems are bigger than others, and can make a property "un-mortageable" until they're taken care of. Some go beyond repairs and can take a creative real estate agent or mortgage broker to overcome.

Here are five problems that can make a home difficult to get a mortgage for:

1 - 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.

If they're willing to pay the higher price of the overbuilt home, buyers can get around this problem by putting more than a 20 percent down payment, Shulman says. For example, if a home selling for $600,000 has an appraisal for $540,000, the buyer can still qualify for a loan by coming up with a 20 percent down payment of $120,000 instead of a 10 percent down payment of $60,000, she says.

2- Unpermitted work

Unpermitted "improvements" on a property can lead appraisers to estimate a home's value off of 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 front door must be built 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.

3 - Non-working kitchen or other major problem

If the house isn't habitable, a lender won't finance it. Major issues are a kitchen or bathroom not functioning, or problems such as holes in the ceiling, walls or floors.

"No lender is going to lend on a house where they ripped out the kitchen and there's no kitchen," Shulman says.

Major issues will require a construction loan, which is more expensive to get, Shulman says. The only fix is to have the seller make the repairs.

4- Flipped too often

If a home has had too many title changes, it's a sign that it's being flipped often for-profit and can make a mortgage loan difficult to get, says Scott Groves, a loan officer at Groves Lending Team in Glendale, Calif.

A 30 percent profit is OK with banks, Groves says, but more than that and they'll require borrowers to jump through a few more hoops, such as getting two appraisals and wanting to see receipts for all upgrades.

"It can be a real pain in the rear, especially if it's a flip within 90 days," he says.

Banks are opposed to flipped houses because in 2006-07, house flippers would keep inflating a home's price by selling it back and forth to each other, Groves says.

To get around this problem, the buyer may have to make a bigger down payment. Groves says he recommends keeping a house for at least 90 days before selling it.

5 - Mother-in-law homes

Properties with more than one home, such as mother-in-law homes, can be difficult to finance. Bennie Waller, a professor of finance and real estate at Longwood University in Farmville, Virginia, says that when he was recently trying to refinance his home with such a unit, lenders told him that loans with more than one property couldn't be sold on the secondary market.

Many of these properties need to be financed with local lenders, requiring variable-rate mortgages that don't have the most favorable of terms, Waller says.

A big national lender pre-approved his loan at 2.75 percent interest for 15 years, but it was later denied for "valuation" issues around the mother-in-law house. He filed a complaint and the loan was later reinstated.

During the complaint process, a local bank approved a 20-year adjustable mortgage for double the rate they had from the national lender.

At the end of the day, a bank wants your home to be livable and resellable - both factors that homeowners would want themselves as buyers.

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