Advancements In Home Financing: Embracing ADU Income For Mortgage Qualification With Neil Anders

We’ve seen in the past year that government agencies have recognized the need to revise guidelines to consider additional income sources that are being utilized by borrowers to meet the higher cost of homes and higher interest rates in the form of accessory dwelling unit income. 

In October, FHA released mortgagee letter 23-17 which immediately revised their guidelines to allow 75% of ADU income to be included in qualifying income up to a maximum of 30% of the total monthly income. 

In November, Trusted Rate engaged with senior members of the VA Loan Guaranty Service regarding guidance for the acceptability of ADU income given the absence of it from the Lender’s Handbook. Ultimately, the query was fielded by VA’s current Chief of Loan Policy who stated that rental income from ADUs should be treated in the same manner as multi-unit rental income guidelines. 

Before this year, in June of 2022, Freddie Mac expanded their policy on ADUs to allow the use of rental income from them for all borrowers and also would now consider 2- and 3-unit properties with ADUs as eligible in response to zoning and ordinance changes in many geographic areas of the country. 

Fannie Mae is still a holdout for allowing rental income from an ADU to qualify (except for the HomeReady product and select boarder income scenarios). The initiative that has moved the needle in the affordable housing space is the expansion of their special purpose credit programs (SPCP) which became available in 15 additional Metropolitan Statistical Areas (MSAs) in 2023. An increase of 350% from 2022. The special purpose credit program, which is piloted by a limited number of lenders to gauge its success, provides borrowers who currently reside in certain census tracts within the select MSAs a downpayment assistance grant as well as other financial assistance such as covering the cost of a home inspection and appraisal. Fannie Mae lists the assessment of expanding financing options for Single Family Residences with ADUs on its pilot transparency page with an end date of June 30th, 2024. We hope that they will also soon allow the use of income from this source to qualify more borrowers.

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