Finally, all the improvements we did to the house over the years were with "renting it out later" in mind.

I don't know how it will affect resale value, but since you would still have garage space in the primary home, the functionality of the home will only be improved.

Then there’s also accountants, attorneys, and credit repair specialists who work with individuals with issues that prevent them from getting a mortgage. 

@Theodore Arzt Did you complete a full credit, criminal, eviction check on the applicant?

Since the property was re-appraised at $480K over a year ago the area has continued to improve and seen further  increases in real estate prices.

Divorce can absolutely slay the credit of decent people. 

@Mark AndrewsYou are required to first allocate the purchase price to land and the building.The amount allocated to land is non-depreciableThe amount allocated to building is depreciableYou may also make improvements to the property which can possibly be added to the basis(if not expensed). 

They may also not have the credit to get a refi done. 

Like business credit for startups, personal loans for the self employed, and so many other unique financing options. 

Know your credit.