FHA borrowers can now use rental income from ADUs to qualify for a mortgage. This includes 203(k) rehabilitation loans.
The U.S. Department of Housing and Urban Development (HUD) and Federal Housing Administration (FHA) have a new policy that allows lenders to include rental income from Accessory Dwelling Units (ADUs) in borrowers’ qualifying income when underwriting mortgages.
An ADU is defined as any single habitable living unit with separate ingress and egress which meets minimum dwelling requirements, that may be added onto or detached from a primary one-unit single-family home.
The policy helps more first-time homebuyers, seniors, and inter-generational families to build wealth by leveraging the power of ADUs.
Here are 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, 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. The guidance provided in the Mortgagee Letter will assist appraisers to more accurately determine the market value of a property with an ADU and also will help advance the maturation of ADU valuation, thereby increasing access to ADU financing as more cities and states remove zoning barriers.
- 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.
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