An obvious way to lessen the impact of a mortgage payment on the family budget is to buy a property that provides both a home and rental income. Probably the most sought after form of this type of housing is a main house with a separate rental unit in back.

In Santa Cruz, this rental unit can be like the one I lived in when I moved to Santa Cruz some 20 years ago. It was a small unit on the back half of the lot behind the landlord’s house and consisted of a bathroom and another room that contained a bed, chair, desk, small table and cooking area. We also see many garages converted into living units that are complete with a bathroom, cooking area and bedroom. Some homes have been divided to provide two separate units, each with a kitchen, bathroom and bedrooms.

These conversions and additions are often constructed without the approval of the city or county planning departments. If that is the case, these potential income sources are illegal and if discovered, could be shut down.

Lenders are wary of properties with these types of improvements and, because there is no guarantee that the rental income from these additions will continue, the rent derived is not allowed to be used to determine the eligibility of the borrower to obtain a mortgage.

Furthermore, lenders will not allow appraisers to give value to an addition that was made without permits and without the blessing of the local government.

There are also many units, additions and conversions in Santa Cruz County that were once made with the full approval of the planning and building departments. However, over the years, due to zoning changes, these units may no longer conform to the current zoning requirements. These units are referred to as "legal, nonconforming" units.

Lenders will not typically allow rent from these units to be counted either due to the fact that if there was a fire that destroyed the unit, current zoning would not allow the unit to be rebuilt.

Prospective home buyers often ask if they can use rent from bedrooms within a house to help them qualify for a mortgage. Again, the answer is no. Lenders allow borrowers to use rent from legal, conforming additions and units to help them qualify for a mortgage. Also, there are now many "granny units" in the county that qualify as legal, conforming structures.

Regardless of their legal status, homes with potential income sources are sought after by home buyers. Buyers just need to be aware that in many cases lenders will not allow the rent to be used for loan qualification purposes. The good news is the mortgage industry today has an array of loans available, and we usually can find a loan for a client that does not require using rent to qualify.

Peter Boutell is a mortgage consultant with a local mortgage company. Send questions to "Lending A Hand," 1535 Seabright Ave., Santa Cruz, CA 95062, or fax to 425-1044. E-mail may be sent to Peter@SantaCruzHomeFinance.com.