The Federal Housing Administration (FHA) has introduced a groundbreaking policy that marks a significant shift in mortgage financing, particularly for properties featuring Accessory Dwelling Units (ADUs). This initiative is set to broaden financing options significantly, aligning with the Biden-Harris Administration’s objectives to enhance housing supply and promote homeownership.

What Are Accessory Dwelling Units?

ADUs are small housing units that can be built inside, attached to, or on the same property as a main residence. These units can serve as a source of rental income for homeowners and help alleviate housing shortages by adding to the community’s available housing stock.

New FHA Policy Benefits

Under the new FHA guidelines, lenders can now include rental income from ADUs when underwriting mortgages. This change is poised to facilitate more borrowers in qualifying for FHA financing, including those opting for 203(k) Rehabilitation mortgages. The policy is especially beneficial for first-time homebuyers, seniors, and intergenerational families, offering them a pathway to enhance their generational wealth through homeownership.

HUD Secretary Marcia L. Fudge emphasized the policy’s role in increasing affordable housing supply and assisting families in augmenting the value of their homes. The move is part of broader efforts to tackle the acute affordable housing shortage affecting many communities across the United States.

Flexibility and Wealth Building

The FHA’s updated approach allows:

• 75% of estimated ADU rental income to be considered for mortgage qualification for certain borrowers. This can dramatically improve access for buyers with limited income, turning the dream of homeownership into reality.
• 50% of the projected rental income from a newly constructed ADU to count towards qualifying for a mortgage under the FHA’s Standard 203(k) Rehabilitation Mortgage Insurance Program. This provision is aimed at homeowners interested in constructing ADUs, such as through garage or basement conversions, thus facilitating more extensive ADU production.

Impact on Appraisal and New Construction

The policy also introduces ADU-specific appraisal requirements, ensuring that property values are assessed more accurately with ADUs in mind. Additionally, ADUs will now be included as allowable improvements under FHA’s mortgages for new construction, paving the way for new homes to be built with ADUs from the outset.

Immediate Implementation

FHA-approved lenders are set to begin offering mortgages on properties with ADUs under these new guidelines immediately, providing immediate opportunities for potential homebuyers.

This policy represents a transformative step toward making homeownership more accessible and affordable. By allowing homeowners to leverage ADU rental income, the FHA is not only helping individuals and families secure their homes but is also contributing to the broader goal of increasing the nation’s housing supply.

For those considering the benefits of an ADU on their property or exploring innovative financing solutions, this policy offers a promising avenue to explore.

Chenine Lozano
Real Estate Finance Expert
562-762-7511

Reach out today to learn more about how this new FHA policy could impact your home purchase plans and help you build lasting wealth through real estate.