Great News for Homeowners – FHA Expands Mortgage Financing for Accessory Dwelling Units

The U.S. Department of Housing and Urban Development (HUD), through the Federal Housing Administration (FHA), has announced (on October 16, 2023) a significant policy change that expands access to mortgage financing for homes with Accessory Dwelling Units (ADUs). This policy shift aims to support the Administration’s housing supply and homeownership goals.

The New ADU Policy:

An ADU is a separate living unit on the same property as the primary residence, providing additional housing options. The FHA’s new policy allows lenders to consider income generated from ADUs when underwriting a mortgage for a primary residence. This means that rental income from ADUs can be included in the borrower’s qualifying income, making it easier for more individuals to qualify for FHA financing for properties that feature ADUs, including the 203(k) Rehabilitation mortgages.

Benefits of the New ADU Policy:

The new policies introduce several key changes:

1. Flexible Rental Income: Some borrowers can now use 75% of the estimated rental income from existing ADUs to qualify for an FHA-insured mortgage. This flexibility opens doors for homebuyers with limited incomes, allowing them to capitalize on ADU wealth-building opportunities.

2. Support for New ADUs: For borrowers planning to add a new ADU to an existing structure, 50% of the estimated rental income can be used to qualify for a mortgage under FHA’s Standard 203(k) Rehabilitation Mortgage Insurance Program. This enables homeowners to create ADUs, fostering homeownership and expanding rental housing options.

3. Clear Appraisal Requirements: The FHA has included ADU-specific appraisal requirements, ensuring that appraisers accurately identify, analyze, and report on ADU characteristics and estimated rental income. This step advances ADU valuation, making it easier for borrowers to secure financing.

4. Inclusion of ADUs in New Construction Financing: The FHA has now added ADUs to the types of improvements that can be financed under FHAs mortgages for new construction. Allowing for more options and flexibility in ADU production.

Immediate Availability

FHA-approved lenders can start offering mortgages on properties with ADUs under the new policies right away.

In summary, the FHA’s new ADU policy is a significant step toward expanding access to homeownership and addressing the affordable housing crisis. By allowing borrowers to include ADU income in their mortgage qualification, this policy helps make homeownership more attainable for a broader range of individuals while also boosting the supply of rental housing in communities. It aligns with Administration’s goals of increasing housing supply and affordability, ultimately working to make quality housing more accessible for everyone.