Can I Get a Mortgage with a Temporary Certificate of Occupancy?

If you attempt to finance a home without a certificate of occupancy, or CO, you will have difficulty obtaining a mortgage. The CO, issued by the township or city where the property is located, certifies that the property is safe for occupancy. Often, the municipality will issue a temporary certificate of occupancy, also known as TCO, pending minor work yet to be completed. Lenders will grant mortgages based on a TCO, but those loans are highly conditional.

If you’re buying a house that’s existed in its current form for years, the CO is already on file with the township and won’t be an issue. However, if you finance a renovation or new construction, both the township and the lender will require the CO. Since the property is the lender’s protection against financial loss, it wants to know that the property is safe for occupancy. Furthermore, if it has to foreclose, it will need to get a CO, incurring the expense of bringing the property to code before it can go to a sheriff’s sale.

A TCO is issued when work is ostensibly complete on a property, leaving only minor improvements to fully finish it. TCOs are good for a set period of time, depending on the municipality -- often about 90 days. If you can’t meet the conditions in that time, you can apply for an extension. Just be aware that the number of extensions is finite. Once the conditions are met, a permanent CO is issued and filed at the municipality. In some places, New York for example, you can get a Letter of No Objection if the property was built before a certain year. This means that the Department of Buildings has no objection to the improvements and you can get a CO immediately without having to worry about a TCO.

Besides the risk a bank can face in foreclosure expense, the risk of closing without at least a TCO can start almost immediately. The collateral value is impacted by the lack of a permanent CO, potentially pushing the loan-to-value ratio above acceptable limits. This will impact the lender as it will need to increase its reserves for loan loss, affecting net income. Additionally, if the property is an investment property, the loan is reliant on the rent to cover the debt service. The landlord will not be able to collect unpaid rent before the CO is issued, potentially inhibiting his ability to repay the loan.

Closing with a TCO is obviously riskier, but there are steps a lender can take to minimize its exposure. First, it will almost certainly perform an inspection, at your expense, to certify that the open conditions do not affect the safety of the property. It will monitor the expiration of TCO and likely require that you obtain a permanent CO before the expiration date. So if the TCO is good for 90 days, the lender may want to see the permanent CO in 75 days. It will want resolution prior to the full 90 days so there isn’t a period where the property is without any type of CO, temporary or otherwise. Finally, the lender may require you to escrow the funds necessary to meet the conditions. If the conditions are not met before the expiration of the TCO, the lender may use the funds to satisfy those conditions, reduce the loan amount or increase the interest rate to mitigate the additional risk.