October 19, 2023
The Federal Housing Administration defines an ADU is “a single habitable living unit with a means of separate ingress and egress that meets the minimum requirements for a living unit.” And now, FHA borrowers can get consideration for ADUs and possible rental income associated with them.
Accessory Dwelling Units
Some homes come with ADUs, others are purchased without them and they are added later by the new owner. Why are ADUs such a potential factor in home loan approval?
Because now, FHA loan rules allow borrowers to apply for a mortgage to buy an owner-occupied single-family home with or without ADUS.
But when they are present or scheduled to be added, FHA loan rules now permit the lender to consider possible rental income from these units as qualifying income for home loan approval purposes.
In the past, FHA loan rules were a bit more restrictive about potential rental income as qualifying income.
Borrowers were often allowed to apply for a loan on a multi-unit home, including anticipated rental income from the unused living units for loan approval IF they had prior landlord experience or could otherwise show the lender that the rental option is more than just wishful thinking.
HUD Rules On Accessory Dwelling Units
The ability to do this under the old rules depended, as mentioned above, on the borrower’s experience as a landlord and the lender’s willingness to consider that expected income as qualifying income.
But the rules have changed, and more qualifying borrowers may be able to claim rental income depending on circumstances.
According to a press release by the Department of Housing and Urban Development, FHA loan rules now allow lenders “to count income from small units of housing built inside, attached to, or on the same property as a primary residence …when underwriting a mortgage.”
Greater Loan Approval Chances With An ADU?
FHA and HUD officials believe these new guidelines for ADUs “…enable more first-time homebuyers, seniors, and inter-generational families to leverage the power of ADUs to enhance the generational wealth building potential of homeownership.”
HUD Secretary Martha Fudge was quoted in a HUD press release noting, “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.”
These new rules are part of a push to increase housing inventory in a time of “critical shortage of affordable housing in communities across the country,” according to the HUD press release.
Borrowers who want to know more about these new FHA loan ADU options should discuss their questions with a participating FHA lender.