Why lenders care

Lenders assess unpermitted renovations for three practical reasons: safety, marketability, and collateral value. Work done outside local code can create safety hazards (electrical, structural, egress), reduce a home’s resale value, and complicate title or insurance coverage. Regulators and investor guidelines also expect lenders to ensure the property is acceptable as collateral (see HUD/FHA and Fannie Mae guidance).

How underwriters evaluate unpermitted work

  • Appraisal: Appraisers must note visible unpermitted improvements. Lenders may exclude the value of those changes from the appraised value or require adjustments for safety/quality. (See CFPB on appraisals.)
  • Property condition and inspections: Lenders use the appraisal and, where required, a property inspection to identify unsafe or noncompliant work.
  • Title and insurance: Unpermitted structures can affect title endorsements and homeowner insurance. Some insurers may refuse coverage until the issue is corrected.
  • Local rules: Acceptable remedies vary by jurisdiction—some cities allow retroactive permits; others require removal or remediation.

Common lender responses

  • Require retroactive permits and inspections: Lenders often ask borrowers to obtain municipal approvals or a Certificate of Occupancy before closing.
  • Holdback/escrow: Lenders may allow closing with funds held in escrow until permits/repairs are completed and inspected.
  • Reduce loan amount or exclude value: If a feature (e.g., finished basement) lacks permits, a lender or appraiser may discount or exclude its contribution to value, lowering the loan-to-value (LTV) calculation.
  • Require remediation or denial: For major structural or safety issues, underwriters can delay approval until work is corrected or deny the loan.

In my experience working with borrowers, lenders are most flexible when: the unpermitted work is minor, a clear path to permitting exists, and documented receipts or licensed-contract warranties accompany remediation plans.

Practical steps for homeowners and buyers

  1. Stop and document: Preserve receipts, contractor agreements, photos, and materials lists. That evidence speeds retroactive permitting and re-inspections.
  2. Talk to the local building department: Many municipalities allow retroactive permits or provide a remediation timeline—start here first.
  3. Get a licensed trades inspection: Hire a licensed inspector or contractor to produce a scope-of-work and cost estimate for bringing the work up to code.
  4. Consider renovation financing or specialized loans: If you need funds to remediate, look at renovation products. See our guide on buying a home with renovation financing for lender expectations and draw schedules: https://finhelp.io/glossary/buying-a-home-with-renovation-financing-what-lenders-expect/.
  5. Use escrow or holdback if needed: Negotiate a lender holdback for repairs to avoid losing a sale if remediation will be completed after closing.
  6. Reappraise or refinance after fixes: Once permits are closed and inspections passed, you can often reappraise or refinance. Read more on refinancing after major improvements: https://finhelp.io/glossary/refinancing-mortgages-after-major-home-improvements-appraisals-timing-and-costs/.

For older homes with multiple legacy repairs, see our detailed guidance on qualifying for renovation loans and how appraisers treat permits: https://finhelp.io/glossary/qualifying-for-renovation-loans-on-older-homes-appraisals-permits-and-lender-expectations/.

Short example

A buyer purchased a house with a finished basement that lacked permits. The lender’s appraiser excluded the basement’s finished-square-footage from value. The buyer either obtained retroactive permits and an inspection or negotiated a lender holdback to complete the remediation after closing.

Quick checklist for borrowers before applying

  • Check municipal permit history online or at the building department.
  • Collect receipts, contractor licenses, and before/after photos.
  • Get a licensed contractor’s scope-of-work and cost estimate.
  • Ask your lender about holdbacks, escrow, or acceptable documentation.
  • If necessary, plan for a renovation loan or reappraisal after fixes.

Sources and further reading

  • HUD/FHA Single Family Housing Policy Handbook (Housing quality and property acceptability guidance) — hud.gov
  • Consumer Financial Protection Bureau (CFPB) resources on appraisals and home buying — consumerfinance.gov
  • Fannie Mae Selling Guide (property eligibility and appraisal guidance) — fanniemae.com

This article is educational and not individualized financial, legal, or construction advice. For specific situations, consult your lender, a local building official, or a licensed contractor.