FHA Expands Access to Mortgage Financing for Homes with ADUs

Housing Finance
Contact: Curtis Milton
Director, Single Family Finance
(202) 266-8597

The U.S. Department of Housing and Urban Development today announced a new policy that allows lenders to count income from accessory dwelling units (ADUs, or small units of housing built inside, attached to, or on the same property as a primary residence) when underwriting a mortgage.

This change allows for the inclusion of rental income from the ADU in the borrower’s qualifying income and would allow more borrowers to qualify for Federal Housing Administration (FHA) financing for properties with ADUs, including 203(k) Rehabilitation mortgages.

The new policies:

  • Allow 75% of the estimated ADU rental income for some borrowers to qualify for an FHA-insured mortgage on a property with an existing ADU. This additional income flexibility will help to increase access to homes with ADUs for home buyers with limited incomes, allowing them to benefit from the wealth-building opportunity of a property with an ADU.
  • Use 50% of the estimated rental income, for some borrowers, from a new ADU the borrower plans to attach to an existing structure, such as in a garage or basement conversion, to qualify for a mortgage under FHA’s Standard 203(k) Rehabilitation Mortgage Insurance Program. This will enable more home owners with limited incomes to build ADUs, helping them sustain homeownership and expanding the production of ADUs as rental housing.
  • Include ADU-specific appraisal requirements for appraisers to clearly identify, analyze, and report on ADU characteristics and the estimated rent the ADU can be expected to generate.
  • Add ADUs to the types of improvements that can be financed under FHA’s mortgages for new construction. This allows new homes to be built with ADUs from the ground up, an important source of ADU production in addition to rehabilitating existing structures.

FHA-approved lenders can begin offering borrowers mortgages on properties with ADUs under the new policies effective immediately.

View the HUD press release.

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