The U.S. Department of Housing and Urban Development, through the Federal Housing Administration (FHA), recently 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) 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 FHA financing for properties with ADUs, including 203(k) Rehabilitation mortgages. 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:

• Allow 75% of the estimated ADU rental income for some borrowers to qualify for an FHA-insured mortgage.
• 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.
• 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 policy change follows MBAKS working with NAHB and passing a resolution to advocate for the flexibility for ADU financing. View the HUD press release.