FHA Announces New Policies for Rental Income on Accessory Dwelling Units (ADUs)

In a move aimed at addressing the critical shortage of affordable housing and promoting generational wealth building, the U.S. Department of Housing and Urban Development (HUD), through the Federal Housing Administration (FHA), has unveiled a groundbreaking policy change. This policy allows lenders like Intercap Lending to consider income from Accessory Dwelling Units (ADUs) when underwriting a mortgage, opening up new possibilities for homebuyers, especially those with limited incomes.

Key Policy Changes

1. Inclusion of ADU Rental Income in Qualifying Income:

Under the new policies, Intercap Lending can now include 75% of the estimated ADU rental income for certain borrowers when qualifying them for an FHA-insured mortgage on a property with an existing ADU. This income flexibility aims to broaden access to homes with ADUs, providing an avenue for homebuyers with limited incomes to benefit from the wealth-building potential associated with properties featuring ADUs.

2. Utilizing Rental Income for 203(k) Rehabilitation Mortgages:

Borrowers planning to attach a new ADU to an existing structure, such as through a garage or basement conversion, can use 50% of the estimated rental income to qualify for a mortgage under FHA’s Standard 203(k) Rehabilitation Mortgage Insurance Program. This innovative approach encourages the creation of ADUs, expanding the availability of rental housing and sustaining homeownership for individuals with limited incomes.

3. ADU-Specific Appraisal Requirements:

The new policies introduce ADU-specific appraisal requirements, ensuring that appraisers can accurately identify, analyze, and report on ADU characteristics and the estimated rent they can generate. This step is crucial in advancing the maturation of ADU valuation, assisting appraisers in determining the market value of properties with ADUs and removing barriers to ADU financing as zoning regulations evolve.

4. ADUs in FHA Mortgages for New Construction:

ADUs are now included as types of improvements that can be financed under FHA’s mortgages for new construction. This means that new homes can be built with ADUs from the ground up, presenting an additional avenue for ADU production and further contributing to the expansion of affordable housing options.

Immediate Implementation

As an FHA-approved lender, Intercap Lending is now able to offer mortgages to borrowers seeking properties with ADUs. These new policies are effective immediately.

*U.S. Department of Housing and Urban Development (HUD) Press Release