1. What type of room was the garage converted to? To a bedroom, kitchen, or just a bonus room?
2. Did the previous owners ADD any new electrical or water supply to the garage? Or are the only utilities to the garage still just the pre-existing washer/dryer hookups that existed in the garage before the conversion?
It is possible to do a loan with a converted garage if the garage was converted to something simple, such as a Family room.
If the converted garage had electrical or water added, then getting a loan gets more difficult. For example, if the owner decided to put a kitchen in the garage, or perhaps a bathroom without permits, the property then becomes non-compliant and getting insurance becomes a problem and getting a loan on the property becomes VERY difficult.
If, for example, the seller built another restroom without permits in the backyard, the restroom built in the backyard will require permits. For the most part, lenders will NOT lend on this property unless it does have permits because of the outside bathroom.
One possible way to get a loan in this difficult case would be to look at who is the existing lender on the property. IF that lender lent on the property previously and it didn't have permits there MAY be a possibility of them re-lending on the structure. IF however, the owner added all these things AFTER the loan was closed, you're going to have a problem.
Guidelines have tightened up A LOT in today's lending market, mainly because of all of the foreclosures and short sales. Previously, IF the appraiser looked at a garage conversion and did NOT give ANY square footage toward living area, many lenders would not be too concerned since that area was NOT counted in the over all square footage and the value of the property was treated as if NO conversion took place.
The real problem comes into play when owners start adding kitchens and bathrooms without permits. This is because of potential fire hazards. A single family residence is supposed to have 1 kitchen and the bathroom count is per the original specs of the floor plan of that unit which is recorded with the building department. If the owner changes any of the original structure without permits it becomes harder to get insurance and loans....ESPECIALLY in today's market.
My lender contacts have closed quite a few loans WITH garage conversions BUT they were closed off rooms with NO additional bathrooms OR kitchens. In several cases the original garage door was still intact, just sheet rocked. This type of conversion is easy enough to convert BACK to the original garage because the structure itself was NOT tampered with.