Qualifying for a home loan may seem next to impossible between high mortgage rates and dizzying property prices. However, a new policy from the Department of Housing and Urban Development (HUD) through the Federal Housing Administration (FHA) now allows the inclusion of rental income from accessory dwelling units (ADU) in the underwriting process, hopefully helping some borrowers to get the extra boost they need to qualify for an FHA loan. The policy change will “allow more borrowers to qualify for FHA financing for properties with ADUs,” the FHA said in a press release.
“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,” says Sarah Edelman, HUD Deputy Assistant Secretary for the Office of Single Family Housing. “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 home buyers.”
“This not only helps more people qualify for a mortgage and build wealth, it also helps to boost the supply in neighborhoods where housing is least available,” added Julia Gordon, Assistant Secretary for Housing and Federal Housing Commissioner.
Rules and Regulations
ADUs, sometimes called in-law apartments, are defined as “a single habitable living unit with a means of separate ingress and egress that meets the minimum requirements for a living unit.” In addition to providing extra privacy to aging parents or grown children in multigenerational households—a growing trend in a time when the cost of housing and healthcare has become an increasing concern—they may be used as long- or short-term rentals.
The difference between a single-family home and a two-unit property is not always clear. According to the Fannie Mae Selling Guide, “Whether a property is defined as a one-unit property with an accessory unit or a two-unit property will be based on the characteristics of the property, which may include, but are not limited to, the existence of separate utility meter(s), a unique postal address, and whether the unit can be legally rented. The appraiser must determine compliance with this definition as part of the analysis in the Highest and Best Use section of the appraisal.” For example, a converted attic without separate utilities in a neighborhood constituted primarily of single-family homes is more likely to be counted as an ADU. Meanwhile, a unit with more than two bedrooms, a private entrance, and a separate address and utilities will typically be counted as a multifamily property, especially if zoning allows this type of dwelling.
Fannie Mae has long considered rental income from multifamily properties a potential source of qualifying revenue under some circumstances. However, ADUs have remained in a grey zone until now.
The new regulations allow 75% of the estimated ADU rental income for borrowers to qualify for an FHA-insured mortgage and a property with an existing ADU. In addition, property owners who want to add an ADU may use 50% of the estimated rental income from the unit to qualify for a mortgage under the FHA’s Standard 203(k) Rehabilitation Mortgage Insurance Program.
We’ll keep you updated on further developments. In the meantime, if you’d like more information about buying/selling or refinancing in today’s market, give us a call or drop us an email.
