A guy wants to sell, but his central system is broken, so he has space heaters in each room. Does that work? Is it going to fly for a loan? What’s an appraiser going to be looking for when it comes to a heat source? Let’s consider some thoughts from Fannie Mae, HUD, local code, and different lenders.
First, as a quick refresher, appraisers are required during a loan to list what type of heat source is present. Appraisers typically turn on the heater during a FHA or VA transaction to be sure it is working, whereas that is not usually required during conventional financing (sometimes it is).
1) FHA
Quick FHA summary: In short, the heat source needs to be able to heat the house to 50 degrees at minimum and it should be automatic. The word “automatic” means it needs to work without someone making it work for an extended period of time. A plug-in space heater isn’t going to cut it because it can’t heat the entire house. Likewise, it’s not going to work for an owner to say, “My central system went out, but I have a fireplace, so we’re all good.” Nope.
Straight from FHA: FHA/HUD 4000.1 (Page 518) states “The Appraiser must examine the heating system to determine if it is adequate for healthful and comfortable living conditions, regardless of design, fuel or heat source. The Appraiser must notify the Mortgagee of the deficiency of MPR or MPS if the permanently installed heating system does not:
• automatically heat the living areas of the house to a minimum of 50 degrees F;
• provide healthful and comfortable heat or is not safe to operate;
• rely on a fuel source that is readily obtainable in the subject’s geographic area;
• have market acceptance within the subject’s marketplace; and
• operate without human intervention for extended periods of time.”
2) FANNIE MAE
Quick Fannie Mae summary: Fannie talks about how heating and other improvements need to conform to the neighborhood and have market acceptance. This means one dude might be fine with a plug-in space heater or his boy scout fire-starting skills, but that’s probably not acceptable in the market. See #4 below with some more thoughts about lenders and Fannie Mae.
Straight from Fannie Mae: B4-1.3-0.5 states, “The improvements should conform to the neighborhood in terms of age, type, design, and materials used for their construction. If there is market resistance to a property because its improvements are not compatible with the neighborhood or with the requirements of the competitive market because of adequacy of plumbing, heating, or electrical services; design; quality; size; condition; or any other reason directly related to market demand, the appraiser must address the impact to the value and marketability of the subject property.
3) LOCAL CODE & ADVICE
Local code: Standards from Fannie Mae and HUD are really important, but we also have to know the local market. For instance, Sacramento County does NOT allow portable space heaters as the main heat source (I’m guessing most areas are like this). There are also requirements for temperature, so if a wall heater, central system, or baseboard system can meet those requirements, then you’re all good.
Practical Advice: If you have a broken system and you’re planning to install a heater that is less traditional, I recommend talking with your loan officer to be sure the underwriter is going to sign off. If an appraiser has already visited the home, you can ask the appraiser what type of systems tend to be acceptable in the market too. Keep in mind appraisers aren’t building inspectors, so they’re probably not going to give specific advice such as the number of baseboard heaters needed to meet code (ask the building department). Also, if you’re wanting to use an alternative type of heat that is technically code compliant but not really used in the market, I’d strongly recommend you talk with your loan officer and appraiser first.
Straight from Sacramento County Code: “When the winter design temperature in Table R301.2(1) of the 2010 CRC is below 60*F (16*C) every dwelling unit shall be provided with heating facilities capable of maintaining a minimum room temperature of 68*F (20*C) at a point 3 feet above the floor and 2 feet from exterior walls in all habitable rooms at the design temperature. The installation of one or more portable space heaters shall not be used to achieve compliance with.”
4) DIFFERENT RULES:
Real estate is hardly ever black and white, which means a strict rule in one place might not necessarily apply to every location or with every lender either. Thus we might see a rural home with nothing but a pellet stove obtain financing because it’s common for that market (which an appraiser would know). But it would be a marketability issue if we saw a house with a pellet stove (and no other system) in a suburban tract neighborhood where everything else has a central system. In that case I imagine most lenders would require a type of heat source that is common for the suburban tract market.
I asked Matt Gouge, a loan officer, to pitch in some thoughts from the perspective of Mountain West Financial:
Freddie and FNMA do not have any specific guides in reference to a properties’ heat source. The main guide FNMA references in their selling guide is B2-3-01 General Property Eligibility. The key is that the home is safe, sound and structurally secure and suitable for year-round use. The requirement of a permanent heat source can vary from lender to lender and geographic locations. A general guide followed by most lenders in the local area defines a permanent heat source as a heating unit appropriate for the GLA of the dwelling, hard-wired into the electrical system of the home and thermostatically controlled. Baseboard heat would be acceptable but must be hard-wired and thermostatically controlled, and it has to produce the appropriate amount of heat for the gross area of the living space. A portable type of heater, a wood burning or pellet stove are not considered a permanent heat source.
I know it’s frustrating to talk about rules that don’t apply everywhere, but then again real estate is not the same for every location, climate, bank, etc… So the rules aren’t always the same either.
I hope that was interesting or helpful.
Questions: Anything else to add to the conversation? Did I miss something? I’d love to hear your take.
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What FHA says about Accessory Dwellings: An accessory dwelling unit (ADU) is defined as a habitable living unit added to, created within, or detached from a primary single-family dwelling and contained on one lot. ADU’s are commonly understood to be a separate additional living unit, including kitchen, sleeping, and bathroom facilities. ADU’s are subordinate in size, location, and appearance to the primary home and may or may not have separate means of ingress or egress. An attached unit contained within a single-family home, also known as a “mother-in-law apartment,” or a “garage apartment” that may or may not be attached to the primary residence are the most common types of accessory dwelling unit. An accessory dwelling unit sometimes involves the renovation of a garage, basement, or a small addition to a primary residence. The determination of whether or not an ADU is a second dwelling unit is to be made by the appraiser and indicated in the site analysis section of the report where zoning, highest and best use, and legal use are addressed. The fact that an ADU is rented or generates income should not categorically result in a determination that the property contains two dwelling units.
What Fannie Mae says about Accessory Dwellings: An accessory dwelling unit is typically an additional living area independent of the primary dwelling unit, and includes a fully functioning kitchen and bathroom. Some examples may include a living area over a garage and basement units. Whether a property is a one-unit property with an accessory unit or a two-unit property will be based on the characteristics of the property, which may include, but are not limited to, the existence of separate utilities, a unique postal address, and whether the unit is rented. The appraiser is required to provide a description of the accessory unit, and analyze any effect it has on the value or marketability of the subject property (Page 583 of Fannie Mae Seller’s Guide).
