The Federal Housing Administration (FHA) is mulling updates to mortgage insurance requirements for single-family homes with accessory dwelling units (ADUs) and seeking feedback on the proposed changes.
ADUs, often known as in-law suites, mother-in-law units or granny flats, are self-contained residential units on the same lot as a single-family home. They are smaller than the main building on the property but still contain all of the basic amenities of a home, such as a sleeping area, kitchen and bathroom. They come in many forms, from converted garages and attached home additions to fully detached junior structures.
With the rental of such units gaining popularity as a form of passive income, the FHA is looking to make it easier for borrowers looking to create ADUs to secure the credit they need.
Under the proposal, prospective borrowers looking to finance a property with an ADU will be able to use either the actual or projected rental income from the unit to help meet FHA income guidelines. Current FHA policy permits using a loan endorsed by the agency to buy, refinance or renovate a property with an ADU, but it doesn’t allow the factoring of revenue to be generated by the ADU as part of a borrower’s qualifying income.
If approved, the FHA would update its appraisal protocols and underwriting requirements to allow for the aforementioned income inclusions, as well as update guidelines to appraisers regarding how to determine and report market rents for properties with ADUs.
The agency published a draft mortgagee letter on Thursday that outlines its plans for consideration of ADU rental income.
“FHA recognizes that ADUs have emerged as a significant source of affordable housing with income potential for property owners and buyers, and that ADUs can also serve as a basis for generational wealth building,” the letter stated. “Additionally, ADU rental income can contribute to mortgage payments and help borrowers sustain homeownership.”
“FHA is at the forefront of the (Biden) administration’s efforts to increase housing supply and affordability,” federal housing commissioner Julia Gordon added. “At a time when housing supply is constrained and ADUs are gaining popularity nationwide, an updated policy has the potential to expand opportunities for low- and moderate-income homeowners to benefit from the wealth-building potential of ADUs while supporting the affordable housing needs of their communities.”
Specifically, the FHA highlighted its interest in feedback regarding the sufficiency of provisions included in the policy that would ensure that borrowers still meet their mortgage obligations if the construction or renovation of an ADU takes longer than anticipated. The draft mortgagee letter is available online, with the FHA encouraging feedback through a Feedback Response Worksheet emailed to the U.S. Department of Housing and Urban Development by April 27.
