Refinancing on home with ADU larger than primary

[Benjamin Fishler]

Looking for advice on refinancing a SFH with an ADU on the lot in San Diego, CA as owner/builder who was planning on living in the ADU and renting out the front house.

We went through the entire loan process, got documents signed, appraisal done, closing disclosures, etc -- and at the very end, we were told that the refi loan is getting denied because Fannie Mae guidelines don't allow for ADU's to be larger than the primary house, and the appraiser won't write it as a 2-unit because it's not zoned for such (which is understandable). The ADU is ~1200 sq ft, the primary house is 1014 sq ft. Both the city and county of San Diego specifically allow ADU's to be larger than the primary home, as long as they're 1200 sq ft or less, and it's fully-permitted/signed off.

I feel like this is something the loan agent and lender should have known/told us about up-front, but they said they didn't know. We gave full disclosure on all the specs and specifics on sq footage before starting the loan.

In terms of credibility -- the two units appraised at just over 1.1 million, and we're only looking for ~390K refinance loan. We both make many times more than would have been required in income from our day jobs, have 800+ credit scores, and much more in savings/assets than would be required -- I feel like this should have been a slam-dunk refi. 

So I guess this is both a word of caution when building an ADU until Fannie Mae updates their conforming guidelines, as well as a question to anyone out there who knows of "non-conforming" or loans with good rates for this type of situation that aren't sold to Fannie Mae/etc.

Thanks for any info.

[Dan H.]

I have seen so much variation in the treatment of ADU re-financing that it is almost a crap shoot. I have seen them treated the same as a duplex even when not zoned for such, but it was in an area close to where such zoning was present (so appraiser apparently did not check the zoning). I have seem pathetically low appraisals associated with the ADU and appraisals associated with the ADU that come near valuing it at about the price per square foot (PSF) for the area (note the PSF is typically still far less than the hands off cost of adding an ADU)

Look into Figure.com to see how they are valuing properties with an ADU without appraisal and giving loans. I have to believe that they are not Fannie/Freddie but maybe they are. Also with your outstanding loan qualifications, you can likely find a bank that would finance with intent to keep the loan in-house. It may come with slightly worse terms but you seem very low risk so you may get similar terms.

I believe you will find fine financing.  The risky appraisal is already complete.  It will just take more work than if your first lender had come through (BTW I would never use that lender again - being able to close on the loan is my highest priority in my lender).

@Dave Foster knows virtually everything about lending.  Maybe he has more or better suggestions than what I provided.

Good luck