Federal Housing Administration Expands Access to Mortgage Financing for Homes with Accessory Dwelling Units

In an effort to increase the supply of affordable housing, the federal government has announced a new policy allowing lenders to consider income from Accessory Dwelling Units (ADUs) when underwriting a mortgage.

What is an ADU? An ADU is a small unit of housing on the same lot as a single-family property and has all the amenities needed for someone to make the space their residence, including a sleeping area, bathroom, and kitchen. This additional living space can be rented out to tenants, thereby contributing to the housing supply in a community. To learn more about building an ADU in Los Angeles, check out this blog.

The U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) put out a press release on Monday, October 16th, explaining some key details of this new policy, including:

Rental Income Inclusion: The new policy allows lenders to include rental income from ADUs in a borrower’s qualifying income, making it easier for borrowers to qualify for FHA financing, including 203(k) Rehabilitation mortgages. This change expands access to financing for properties with ADUs.

Increased Homeownership Opportunities: The policy hopes to help first-time homebuyers, seniors, and inter-generational families leverage ADUs to enhance the generational wealth-building potential of homeownership. By allowing ADUs to contribute to the qualification process, more individuals and families with modest means can benefit from homeownership.

Flexibility for Existing and New ADUs: The policy permits borrowers to use 75% of the estimated ADU rental income to qualify for an FHA-insured mortgage on a property with an existing ADU. For borrowers planning to add a new ADU to an existing structure, such as a garage or basement conversion, 50% of the estimated rental income can be used for qualification under FHA’s Standard 203(k) Rehabilitation Mortgage Insurance Program.

Appraisal Requirements: The policy includes ADU-specific appraisal requirements, ensuring accurate identification, analysis, and reporting of ADU characteristics and estimated rent. This guidance will help appraisers determine the market value of properties with ADUs, advancing ADU valuation and increasing access to ADU financing.

Financing New Construction: ADUs have been added to the types of improvements that can be financed under FHA’s mortgages for new construction. This allows for the construction of homes with ADUs from the ground up, further contributing to ADU production and expanding housing options.

If you’re looking for a home and are curious about this new policy, email us or give us a call at (323) 412-9060. We’d be happy to tell you more about ADUs and help you decide if leveraging this policy could be a worthwhile option for you and your family.

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