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Monday, October 16, 2023

Have you ever considered adding an additional living unit on your property, or purchasing a home with an existing additional unit?  These types of properties are popular for generating revenue from both short-term and long-term rental. 

WASHINGTON – The U.S. Department of Housing and Urban Development, through the Federal Housing Administration (FHA), today announced a new policy which allows lenders to count income from small units of housing built inside, attached to, or on the same property as a primary residence (Accessory Dwelling Units (ADU)) when underwriting a mortgage.

Accessory Dwelling Units (ADUs) come in various shapes and sizes.  Technically they are second independent living units located on the grounds of the primary units. Adding an ADU raises the value of the property and creates a source of passive income through short-term and long-term rentals.

This change allows for the inclusion of rental income from the ADU in the borrower’s qualifying income and will allow more borrowers to qualify for FHA financing for properties with ADUs.

ADUs can be rented out to tenants, thereby adding to the supply of housing in a community. In addition, this new policy will enable more first-time homebuyers, seniors, and inter-generational families to leverage the power of ADUs to enhance the generational wealth-building potential of homeownership.

“The new policies provide greater flexibility for the use of rental income from ADUs, which will help more borrowers qualify for FHA-insured financing on homes with ADUs,” said Deputy Assistant Secretary for Single Family Housing, Sarah Edelman. “We’re pleased that we’ve had such widespread support from the housing industry – support that has helped us deliver this meaningful solution for the nation’s homebuyers.”

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 homebuyers 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 homeowners with limited incomes to build ADUs.
  • 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. The guidance provided in the Mortgagee Letter will assist appraisers to more accurately determine the market value of a property.
  • 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 may begin offering borrowers mortgages on properties with ADUs under the new policies effective immediately.