Mom bought a 3/2 home (California) with a detached one bed, one bathroom unit, that we believed to be permitted as such, as the MLS listing "description" described as "The guest house is a 1/1 and includes it's own indoor laundry, single car garage and updated kitchen with granite countertops," however, it turns out the 1/1 was only permitted as a shop with a bathroom, and was never permitted as an Accessory Dwelling Unit.

Is it zoned multi-family or a single family with an accessory dwelling?

Example: you have $50K to rehab the house. your draw request says that you will spend $12,500 for "cabinetry", $9,500 for "bathroom accessories", and $10,000 for "decorations"... but you go ahead and start changing the plumbing, electric, and put a new HVAC.... well, the bank wont give you any money until you get to the $12,500 cabinets, or the $9,500 bathroom accessories. 3) The bank will keep 10% of each draw until the end. 4) The contingency reserve can be requested at "anytime"; HOWEVER, Unless your bank feels the changes in the work were necessary, they wont give you the money till the end.5) Choose right your contractor before the loan closes...

I only see how this could be useful if you are refinancing a home you already own or buying the next one.This is the pdf from Fannie Mae with more information: https://www.fanniemae.com/content/fact_sheet/homeready-boarder-accessory-unit-income.pdfAny guidance would be helpful.

@David Fairall I did not split the meters on my basement, but the city did not require me to do that in order to make it a legal accessory apartment.  

First, the property is not approved to have an Accessory Dwelling Unit.

I am also hoping to find a house with a possible accessory apartment that I can legitimize and use the rent to reduce my costs. 

My current servicer has the property as a single-family in their system, might I qualify for single-family terms by describing the detached garage duplex as an accessory dwelling unit?

Many basements are converted into ADUs (Accessory Dwelling Units) and rented out as studios.

If the lot is really small (and with that density limit) you may be looking at a single family home only but some jurisdictions have begun to allow for ADU's or DADU's (accessory dwelling unit, detached accessory dwelling unit) which could allow for someone to have a small apartment on a single family lot spreading out their mortgage costs and / or allowing you or them to condo it out and sell separately.