WASHINGTON – The U.S. Department of Housing and Urban Development (HUD) will allow 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 (ADU) – when underwriting a mortgage.

The broad goal is to boost the nation’s supply of affordable homes, but the immediate impact would help more FHA borrowers qualify for a mortgage, including 203(k) Rehabilitation mortgages.

Under the program, ADUs can be rented out to tenants, but HUD says the program will also enable more first-time homebuyers, seniors and inter-generational families to buy a home.

“Increasing the supply of affordable housing and helping families  create generational wealth is what today’s action … is all about,” says HUD Secretary Marcia L. Fudge. “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.”

How FHA’s new ADU policy works

FHA defines an ADU as a single habitable living unit with a means of separate ingress and egress that meets the minimum requirements for a living unit. An ADU is a private space that is subordinate in size and can be added to, created within, or detached from a primary one-unit single-family dwelling.

The new policies:

• Allow 75% of the estimated ADU rental income for some borrowers to qualify for an FHA-insured mortgage on a property with an existing ADU. The additional income will be enough for some buyers to move from “unqualified” to “qualified” when they apply for an FHA loan.
• Use 50% 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. This option applies to a mortgage under FHA’s Standard 203(k) Rehabilitation Mortgage Insurance Program, which allows borrowers to roll the cost of planned upgrades into their primary first mortgage.
• Have ADU-specific appraisal requirements. Appraisers must 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 allows new homes to be built with ADUs from the ground up – an important source of ADU production in addition to rehabilitating existing structures, according to HUD.

FHA-approved lenders may begin offering borrowers mortgages on properties with ADUs under the new policies effective immediately.

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