In a significant move to expand access to homeownership and address the nation’s affordable housing challenges, the Federal Housing Administration (FHA) has announced a new policy that allows lenders to count income from accessory dwelling units (ADUs) when underwriting a mortgage. This groundbreaking decision paves the way for more families, especially first-time homebuyers, seniors, and inter-generational households, to leverage the financial potential of ADUs and achieve their homeownership aspirations.
What are ADUs and their Benefits?
ADUs, also known as “granny flats” or “in-law units,” are secondary housing units located on the same property as a single-family home. They can be attached to the main house, built as a separate structure, or even incorporated into an existing garage or basement. ADUs offer a multitude of benefits, including:
Increased rental income:
Homeowners can generate additional income by renting out their ADUs to tenants, providing a valuable source of revenue.
Enhanced affordability:
The rental income from an ADU can help offset the mortgage costs, making homeownership more affordable for many families.
Flexible living options:
ADUs provide flexible living arrangements, allowing families to accommodate aging parents, adult children, or extended relatives.
Expanded housing supply:
ADUs contribute to the overall housing supply, particularly in areas where traditional housing options are limited.
New FHA Policy
The new FHA policy introduces several key changes that significantly expand access to ADU financing:
75% ADU rental income eligibility:
Borrowers can now count up to 75% of the estimated ADU rental income towards their qualifying income when applying for an FHA-insured mortgage on a property with an existing ADU.
50% ADU rental income for rehabilitation mortgages:
Borrowers can count up to 50% of the estimated ADU rental income when using FHA’s 203(k) Rehabilitation Mortgage Insurance Program to finance the construction of an ADU on an existing property.
ADU-specific appraisal requirements:
Appraisers will now be required to clearly identify, analyze, and report on ADU characteristics and estimated rental income, ensuring accurate property valuations.
Impact on Homeownership and Affordable Housing:
The new FHA policy is expected to have a profound impact on homeownership and affordable housing.Increased access to homeownership:
More families, especially those with moderate incomes, will be able to qualify for FHA-insured mortgages on properties with ADUs, expanding their homeownership opportunities.
Enhanced affordability of homes with ADUs:
The ability to count ADU rental income will make homes with ADUs more affordable, particularly for first-time homebuyers.
Boosted production of ADUs as rental housing:
The increased demand for ADUs is likely to incentivize more homeowners to build or convert existing spaces into ADUs, expanding the supply of rental housing.
The FHA’s new policy on ADU financing marks a significant step forward in addressing the nation’s housing challenges and promoting homeownership opportunities. By unlocking the financial potential of ADUs, the policy will enable more families to achieve their dream of homeownership, while simultaneously expanding the supply of affordable rental housing.
