It has something to do with regulations for commercial loans... very different from residential. 

are great.Credit unions regulated a bit different and often can be more flexible on terms.I can refer you to AR Federal credit union in Little Rock, I just did a refinance with them, and Bancorp south, also Centennial is good value.

I have been looking at zoning regulations but I am having a hard time figuring out if I am allowed to convert existing structures into discrete units.

The State Board of Insurance regulates these and we do not have a Transfer Tax in NM.  

We have only dealt in commercial paper as its simply not regulated like Owner occ.. but its not as plentiful.. then there are licensing issues in some states. 

I've done a fair amount of searching to see if I can find any regulations prohibiting this and so far none have come up, but something in my brain is telling me that I'm probably missing something here. 

But it be harder to get into property at times with an FHA because of the rules and regulations on what they can loan on.also if you are doing less than 20% down you will eventually have to refinance to get the pmi to drop off on an fha loan.

Regulation defines what is illegal and helps you identify best practices. 

The violation or enforcement of those portions of any law or government regulation concerning:a. building;b. zoning;c. land use;d. improvements on the land;e. land division; orf. environmental protectionNow I haven't seen or read the OP's so I don't know if it's an HO's policy or if there is an exception to coverage which might affect the underwriter's liability if it's otherwise provided. 

Unlike, say, asbestos floor tiling where unless it’s cracked you really don’t have an issue.We were uncomfortable renting it—possibly to kids—without cleaning it, and it helped to make the numbers not work so we bailed.It feels right in between “oh cmon this is nothing” and “oops major problem” I think the trend is towards more regulation on that not less.