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FHA mortgage lenders can now include rental income from accessory dwelling units (ADUs) when qualifying borrowers thanks to a policy change announced Monday by the Department of Housing and Urban Development.

Marcia Fudge

The Biden administration “is committed to increasing the housing supply so that more people have access to quality housing that they can afford so that their families can thrive,” HUD Secretary Marcia Fudge said in a statement announcing the new policy.

HUD said the new policy, which went into effect immediately, should help more borrowers to qualify for Federal Housing Administration (FHA) financing for properties with ADUs, including 203(k) Rehabilitation mortgages.

The hope is that more first-time homebuyers, seniors, and inter-generational families will be able “to leverage the power of ADUs to enhance the generational wealth building potential of homeownership.”

ADUs — also known as granny flats, in-law units, or tiny homes — are seen as a tool for increasing the supply of affordable housing by allowing existing homeowners to “upzone” their property and build another smaller, secondary structure. Many cities and counties have loosened restrictions on ADUs and some states, including California and Vermont, have given homeowners leeway to build them regardless of local zoning.

Fannie Mae will back mortgages that help borrowers add, build, or buy an ADU but only on properties occupied by a one-unit, primary residence. Unless they’re taking out a HomeReady mortgage loan, borrowers must qualify for the mortgage without considering any rental income from the ADU. Freddie Mac allows ADUs on two- and three-unit properties, but lenders can only count rental income from ADUs on one-unit, primary residences when qualifying borrowers.

The new FHA policy is more generous in that respect, allowing rental income to be considered for properties that are “or will be a one-unit dwelling with an ADU, a two- to four-unit dwelling, or an acceptable one- to four-unit investment property.”

The new FHA policy allows 75 percent of the estimated ADU rental income to be considered when qualifying borrowers for properties with an existing ADU, or 50 percent of the estimated rental income from a new ADU the borrower plans to attach to an existing structure, such as in a garage or basement conversion.

The policy also includes ADU-specific appraisal requirements to identify, analyze, and report on ADU characteristics and the estimated rent the ADU can be expected to generate.

“Increasing the supply of affordable housing and helping families to create generational wealth is what today’s action making it easier to finance an accessory dwelling unit is all about,” Fudge said. “This is a part of our work to help address the critical shortage of affordable housing in communities across the country and help people increase the value of their homes.”

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