203k Loan - What if you can't get required permits?

[Christina Fenn]

Hello All:

My husband and I are under contract for a home that we are so excited about. It will be our first home purchase. This is a multi-family home with 3 units and we will owner occupy for approx. 1 year or so and then plan to fully rent and purchase a single family home for ourselves. We're hoping this is the first step into starting to invest in rental properties and the real estate world.

The properties are summer rentals and currently have no heat (to our knowledge all previous owners had no mortgage so this was never an issue for them when purchasing)- because of this along with the amount we have available for a down payment and that we're purchasing initially as a primary residence as opposed to an investment property we're going the 203k route for our loan. 

We're currently under contract and everything has been moving along very well. We're looking to select our contractor this week and move closer to closing the deal. Per the HUD consultant the 1 thing we're required to do per FHA would be to add heat. That is the only work we're going to have done under the 203k loan - anything else we're going to self perform. The scariest part of this is that we're very uncertain if permits will be approved by the town zoning board for heat. These are non-conforming units and we've been receiving conflicting information from both contractors, local realtors/other owners as well as the zoning office. We're hearing both that permits would be denied and we'd have to apply for a variance by some and that there are lots of other properties in the town which have been able to add heat from others. If we weren't "required" to add heat by FHA we would never even consider doing it; except for potentially the 1 we will be occupying initially to help us get through the winter without freezing. As I mentioned, these are summer rentals and we have no intention of trying to rent them during the winter.

We do not want to walk away from this deal as we know it's a fantastic investment and something we both are passionate and excited about. We're just scared about the permit and what happens in the event we're denied? We've asked dozens of people and no one has been able to give us an answer on what happens to a borrower should permits and/or a variance for work required be denied by the zoning board and it's out of your control. Permits aren't required until the loan is already closed and you've taken possession of the property so - Do they take your house away? Do you just owe the money that was borrowed and aren't allowed to use it? Are there penalties/consequences? What is the outcome? I've looked all over the internet and can't find a single resource to explain this. Our lender has advised that its just as simple as you can't do the work so they don't release the funds - but we're worried it's not that simple.

Any advise would be so appreciated!! Thank you!!