Appraisal and Mortgage Denied by Underwriter

[Charity Phillips]

Hi all, 

We are currently deep in the process of buying our first home in Louisiana.  It is a 1br/1br home built for a grandmother with 1660 sq ft, has an additional 1br/1ba  Rental home on the property, and sitting on 1 acre of land.  A golf course is being constructed a quarter mile away. The home has electricity and plumbing in a 600 sq ft. unfinished attic which we intend to convert to more bedroom and bathroom areas.  We know the seller is very motivated, as she is selling this home (her mother's) and her home next door and moving away.  Listing price was 205K, we agreed to a purchase agreement at 185k.  Our appraisal came back at 170K, citing "Fair" functional utility because it is a 1 br/1ba & a recent foreclosure on a comp home lowered the appraisal value.  We wrote the seller a letter about the appraisal challenges (bank not lending above appraisal, and that other buyers would have the same hangups) and they accepted our offer at appraisal price of 170K.  We just got word from our lender that the underwriters have denied the appraisal due to functional utility being "Fair" instead of normal, "No good usable comps-distance of 3 miles or greater are not acceptable.  No comp has a guest house- only work shops or none at all to compare."  It is a cute, quirky home on an acre in a very desirable and developing part of town.  We already have a renter for the rental unit that will cover most of our mortgage to begin with.  My father is a contractor and would help us finish the work required to bring the home to Normal functional utility.  We feel the price we are getting with the work we can put in to increase its value is a deal; however we are hung on the bank now.  We have used a 1 year tax return conventional loan underwriting because my husband's business generated far more income in 2014 than in 2013.  However this limits the amount of lenders we have options to.  Any advice on how to close this deal?