Hi Mimi,

You were not denied an appraisal - what likely happened is that the lender or loan officer took a look at your property description and flagged a potential eligibility issue before spending money on an appraisal that might not go anywhere.  That is actually them doing you a favor.

Here is the issue.  HUD allows a one-unit home with a single accessory dwelling unit (ADU) - a basement apartment qualifies as an ADU.  The problem is not the unit itself.  The problem is whether it is permitted.  HUD requires the property to comply with local zoning laws, and an unpermitted unit is a red flag for FHA insurance.  No FHA insurance means no reverse mortgage.

Your two most realistic options are:

1.  Get the unit permitted.  Contact your local zoning office and find out whether the basement unit can be brought into compliance.  If it was built to code, permitting may be more straightforward than you expect.  Costs vary a lot depending on your jurisdiction and what work is required, so get that information directly from your local office before assuming it is out of reach.

2.  Remove the kitchen.  If permitting is not an option, removing the kitchen from the basement unit may resolve the issue.  Without a kitchen, the space is no longer classified as a separate dwelling unit - it becomes a finished basement.  That eliminates the unpermitted ADU problem entirely.  Talk to your lender about whether that modification would be enough to move forward.

Start with a call to your local zoning office.  That conversation will tell you quickly which direction makes more sense.  Once you know where you stand on permitting, loop your lender back in and go from there.

Reference: HUD Handbook 4000.1, Section II.B.2.iii(B)(4) - Accessory Dwelling Units (PDF page 586).