Permit or no permit? That is the question. Does FHA require permits for an addition? I have local real estate agents ask me this question quite a bit. The answer in short is “no”, but there is really more to understand about this issue other than just a simple “no”.
Straight from FHA/HUD:
HUD feels that any addition or modification should comply with applicable building codes of the local jurisdiction; however we do not require proof. Pursuant to HUD Handbook 4150.2, the Department has neither the authority nor responsibility for enforcing laws of the municipality; therefore, permits are not required. The property must however be in compliance with local land use regulations (zoning) of the subject site, i.e. a legal use.
The appraiser is not expected to have the expertise or knowledge to determine if an addition or modification is properly designed and constructed, however, the appraiser should; describe the addition/modification, indicate differences, if any, in the actual gross living area compared to public records, and note if the addition/ modification appears to be completed in a workmanlike manner.
The appraiser should value the addition/modification appropriately according to its contributory value in the market. It is not acceptable to exclude the addition or modification from value solely for the lack of permits issued by the local jurisdiction.
Basically, if there is an addition, it must be built in a professional workmanlike manner as well as serve a use. This addition, whether permitted or not, can contribute to market value according to HUD (if it does legitimately contribute to market value). However, keep in mind that the lender doing the FHA loan may have a big problem with a lack of permits. Some lenders require permits and will not fund a loan with an illegal addition. Moreover, if there is an illegal addition, how does the city or county view such an add-on?
Let me know if you have any questions. Call 916.595.3735, email me, or contact me through my website.
NOTE on 04/02/2013: I cannot find the original document where I quoted HUD in this post. I believe it was from an email from HUD. Please read this post and the comment thread for more information. It is important to realize that appraisers have to rely on the HUD Handbook as well as information provided by HUD for issues that are not readily addressed in the Handbook. Call 800-CALL-FHA to get in touch with FHA, who can then put you in touch with your local HUD Home Ownership Center if need be.
I’ve seen lenders fully reject the house for an FHA loan because of not having permits, even on a very nice addition. Thanks for the nice commentary.
Case in point, Sonja. You highlighted the exact issue at hand. Thanks for sharing.
This is great information. Thanks for putting it together and sharing.
Thanks Bryan. I’ve found this to be a real source of confusion among local agents, and it’s always a good conversation to be had to help eliminate some misunderstandings.
Thanks for this post – can you post where the HUD text is from? I’d like to quote it directly from the HUD source and be able to tell the lender the HUD webpage or publication where it appears. Thanks!
Charles, I couldn’t find the original document I have, so I am drawing a blank on providing the source. My suggestion would be to call HUD, and they can provide something I’m sure. Sorry I couldn’t offer something more pointed. Take care.
what about permits on finishing an unfinished basements? our appraisal recentanly would not value the remodel because she did not permits on file. This is very frustrating considering the remodel consisted of sheetrock, paint, carpet and new appliances for a bathroom.
Was your remodeled basement actually completed? I couldn’t quite tell if it was or not. Were you expecting the basement to be given value as square footage for the house or maybe some additional value as a glorified basement at least? If the area was permitted, hopefully the appriaser considered whether it would add value or not in the market. Did you show the appraiser permits? As an FYI, basements are typically not recognized as square footage because they are below grade. Most lenders count living area as that which is above grade.
I sited your text believing it was from HB 4150.2 in a recent appraisal with an unpermitted (well constructed) addition. The lender has come back requiring it to be given NO VALUE. I read through all HUD docs and HB’s. I found no specific text supporting this article. The problem is, the cost to permit an addition can be more than its contribuitory value, and without a City inspection, valuing such space is a real shot in the dark.
Hi April. I’m so sorry if that was confusing. I didn’t source the article as being from 4150.2, though I can see where it might look like that. It was my mistake not to source it at all, though I believe this was from an email received from my FHA HOC. Honestly, it’s been quite a while since I published this article, so if only I had the original document / email.
One of the difficulties with FHA standards is that so many things are not written down and made clear, so we have to rely upon phone calls and conversations with HUD representatives to glean information like this. For instance, there is nothing in writing stating CO detectors are needed, but when we call our local FHA Home Ownership Center, they’ll tell us day and night that they are required because California State law requires them. While the aforementioned verbiage may not be in the HUD handbook, it has been reiterated by the Santa Ana HOC on a very consistent basis to myself as well as other local appraisers.
I am not surprised to hear the lender take that stance. Lenders have their own policies on additions. HUD might see it one way, but as I wrote in the article above, the lender may have a whole different set of guidelines.
Hi Ryan,
Yes, you did correctly state that each lender has their own policy, I just hate it when they conflict. Like the Cost Approach, FMAE doesn’t require it, but lenders still do, why? It is usually useless. CO detectors…don’t get me started. As an appraiser, if we know a code violation exists, we are supposed to call it out, FHA or not.
I do remember something circulating years ago from FHA about valuing non permitted additions, and when I went looking for it I found your article. In our local market, City authority is ignoring additions, but that doesn’t mean in the future they will. Because Code isn’t enforcing, illegal additions are quite common and do have value, but the lender doesn’t want to loan on it (I don’t blame them).
People really should get permits to avoid the loan headaches that can be created in the future. I’m like you in that I don’t blame them either. Thanks April.