Can I live in an illegal unit to meet the residency requirement?

Question

I haven't been able to find the answer to this online. So I'm hoping someone here might know. Does the residency requirement for primary housing require living in a legal unit? In Chicago, there are quite a few buildings with illegal garden units, and I thought it might be possible to live in one of those while I'm trying to make it legal with the city but would that be against FHA guidelines or conventional loan requirements? I'm also unsure who to ask this question, is that attorney territory or MLO?

Daniel Baker · Answer

Hey Dylan!  I had a friend go though this in 2020 and this is what I learned.  To add on to what @Sarita Scherpereel and @John Warren you should be able to ask your team!  A few things to add here if you go the FHA route.

- Assuming you can pass the FHA self sufficiency test (very hard now with rates where they are, the new 5% down programs are probably a better option) you would have send a letter to your lender stating you would live in one of the units that makes up the zoning certification (legal units) for the building.

-Your FHA inspector is going to have to walk into all available spaces in the property and your loan will not be approved if there is an additional living space (non conforming unit) on the property.  However, the space is considered non habitable if the oven/ stove is removed and the gas line is capped.  Everything else in the non conforming unit can stay, but the oven must me removed and the gas line must be capped.  The unit is now considered non habitable and will pass a FHA appraisal.  I would verify this, but this was the rule in 2020.

- To add on to what @Sarita Scherpereel said you are still taking a risk with the city on the nonconforming unit even if you get the loan

Jonathan Klemm · Answer

Hi there @Dylan Cadet!  Welcome to the Chicago BiggerPockets Community!

Everyone above made the most important point - "IN THE EYES OF THE LENDER" or on paper you need to be living in the "legal unit".  Is any lender going to know that you are living in the lower garden non-conforming garden unit....highly unlikely.

Also, I think an important thing to distinguish is illegal units vs. non-confirming.  Non-confirming just means that an existing unit is there, but doesn't conform to the current building codes.  Illegal means that there is violations and the city deems the space uninhabitale until brought up to code.

Now you can have a non-confirming unit that becomes illegal because someone calls the city and you get violations, however, it is COMMON PRACTICE in Chicago to rent out or stay in non-confirming units.

John Warren · Answer

@Dylan Cadet to piggyback off @Sarita Scherpereel you should be able to ask your realtor, your attorney and your lender. If you cannot ask all three of these team members, then you should really examine your team! There are tons of qualified folks in Chicago that know the game.

As for living in an illegal unit, I would really focus on whether this unit is nonconforming or illegal. There is a MASSIVE difference. A nonconforming (grandfathered) unit would be ok. An illegal unit (on the cities radar, no go living there) not so much.

In terms of making a unit legal, I was on a call last week with some alderman talking about the ADU program and some of the challenges. Big housing providers who know the game and have in house construction teams were throwing around 100-200k to make a unit "legal". That is rarely worth it for a first time investor.

Paul De Luca · Answer

Through the eyes of the lender and on paper, you can't say you will be moving into the illegal unit when going through the sale process. If you decide to move into that unit once you close though, that's your business. I'd just keep that between you and your realtor.

Ty Coutts · Answer

Hey Dylan,

The residency requirement for primary housing generally requires living in a legal unit. For FHA guidelines and conventional loan requirements, the property must meet local zoning and housing codes. Living in an illegal unit, even temporarily, could jeopardize your eligibility for certain loan programs.

I am a Loan Officer, and if you would like to chat further about your specific situation, I can answer any questions you may have. Feel free to DM me any time. Let’s set up a call so you can get this situated!

Sarita Scherpereel · Answer

You should understand the risks involved. Just because other people do it or have done it doesn't mean it the right path for you. Unfortunately, too many trivialize the risks on these forums. Then we see owners in trouble because they have been caught by the city. I host an investing meet up and every 2-3 meetups someone comes that is in trouble with either living in or renting the non-conforming space. Usually, these examples didn't understand or know what to look for when seeing these spaces to help mitigate the risks.

I'm not trying to create worry but it is the hard truth of what happens here.

Jack Matthias · Answer

You have to move into a legal unit whether it's FHA or Conventional.

Sarita Scherpereel · Answer

Hi @Dylan Cadet Great questions! As @Ty Coutts mentioned you have to live in the legal unit. You cannot count any non-conforming/illegal units income towards the total income for the property either. So if you're looking at the self sufficiency test that can be tricky!  Working with the city to create a legal unit is not worth the time or effort in most cases. Even with the recently improved ADU regulations, for most house hackers it still a long process that could leave them with a unit that is not legal. Due to the timeline of that process, it is not something you can do (or have the seller do under contract).

Yes, we are in attorney territory. BUT Your realtor should be a savant at non-conforming spaces- if you look to purchase in Chicago. There are many really great realtors active on this forum. If you look at other threads on the Chicago market this topic comes up a lot! You can see what the general advise is. If you're looking at this market it is really important to understand the risks of the non-conforming units before you waste your money and time on an inspection. Your attorney will not be with you at showings to guild you through this!

Can I live in an illegal unit to meet the residency requirement?

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