FHA's Game-Changer: Expanding Mortgage Access for Homes with ADUs

In a groundbreaking move, the U.S. Department of Housing and Urban Development (HUD) has introduced a new policy that promises to reshape the landscape of housing finance. This policy, which we've learned about through the National Association of Home Builders (NAHB), permits lenders to consider income generated from Accessory Dwelling Units (ADUs) when underwriting a mortgage. ADUs are small housing units constructed inside, attached to, or situated on the same property as a primary residence.

The impact of this change is significant, as it enables rental income from ADUs to be included in the borrower's qualifying income. Notably, this adjustment expands opportunities for more borrowers to qualify for Federal Housing Administration (FHA) financing for properties featuring ADUs, including the 203(k) Rehabilitation mortgages.

Key Highlights of the New Policy:

75% of Estimated ADU Rental Income: For some borrowers, 75% of the estimated ADU rental income can now be considered when applying for an FHA-insured mortgage on a property with an existing ADU. This added flexibility in income assessment opens doors for homebuyers with limited incomes, providing them access to properties with ADUs and the wealth-building potential they offer.

50% of Estimated Rental Income from New ADUs: In the case of borrowers planning to construct a new ADU attached to an existing structure (e.g., a garage or basement conversion), they can now use 50% of the estimated rental income to qualify for a mortgage under FHA's Standard 203(k) Rehabilitation Mortgage Insurance Program. This provision aids homeowners with limited incomes in building ADUs, supporting homeownership sustainability, and fostering the production of ADUs as rental housing.

ADU-Specific Appraisal Requirements: The new policy mandates ADU-specific appraisal requirements, ensuring that appraisers clearly identify, analyze, and report on ADU characteristics and the expected rental income it can generate.

Inclusion of ADUs in New Construction Financing: ADUs are now included in the types of improvements that can be financed under FHA's mortgages for new construction. This paves the way for the construction of new homes with ADUs, a crucial source of ADU production in addition to the rehabilitation of existing structures.

FHA-approved lenders are now authorized to offer mortgages on properties with ADUs, effective immediately. This policy change holds the potential to enhance housing affordability and accessibility for a broader range of homebuyers, opening up new possibilities in the housing market. For further details, you can refer to the official HUD announcement or read the full article here.