Just a week after Governor Gavin Newsom signed 4 new major ADU bills, the U.S. Department of Housing and Urban Development (HUD) has introduced a groundbreaking policy through the Federal Housing Administration (FHA) that could revolutionize homeownership opportunities and ADU Financing in California.
The Federal Housing Administration (FHA), under the U.S. Department of Housing and Urban Development, has introduced a new policy today. This policy permits lenders to consider income from Accessory Dwelling Units (ADUs) – small housing units within, attached to, or on the same property as a primary residence – when underwriting a mortgage. This inclusion of ADU rental income in the borrower’s qualifying income could enable more individuals to qualify for FHA financing for properties with ADUs, including 203(k) Rehabilitation mortgages. As ADUs can be rented out, they contribute to the community’s housing supply.
Furthermore, this policy could empower first-time homebuyers, seniors, and inter-generational families to utilize ADUs as a tool for generational wealth building through homeownership.
This announcement aligns with the Biden-Harris Administration’s Housing Supply Action Plan, emphasizing their commitment to addressing affordable housing challenges and enhancing homeownership access. See a fact sheet released today, from the White House, announcing new actions on homeownership.
FHA Empowering Homeownership through ADU Financing in California
The FHA is propelling the dream of homeownership within reach by empowering Californians to invest in ADUs. The following policy shifts by FHA opens up new horizons, allowing lenders to consider income generated from ADUs during mortgage underwriting. This pivotal change amplifies financing options, especially for those with limited incomes, making it more feasible to invest in properties featuring ADUs.
Key Policy Changes
The FHA’s new policy allows lenders to consider income from ADUs when underwriting a mortgage. This change could enable more first-time homebuyers, seniors, and inter-generational families in California to leverage the benefits of ADUs to enhance their wealth-building potential.
Here are the key changes regarding FHA ADU financing in California :
Income Inclusion
Allow 75% of the estimated ADU rental income for some borrowers to qualify for an FHA-insured mortgage on a property with an existing ADU. This additional income flexibility will help to increase access to homes with ADUs for homebuyers with limited incomes, allowing them to benefit from the wealth-building opportunity of a property with an ADU.
Rehabilitation Mortgage Insurance Program:
Use 50% of the estimated rental income, for some borrowers, from a new ADU the borrower plans to attach to an existing structure, such as in a garage or basement conversion, to qualify for a mortgage under FHA’s Standard 203(k) Rehabilitation Mortgage Insurance Program. This will enable more homeowners with limited incomes to build ADUs, helping them sustain homeownership and expanding the production of ADUs as rental housing.
Appraisal Requirements
Include ADU-specific appraisal requirements for appraisers to clearly identify, analyze, and report on ADU characteristics and the estimated rent the ADU can be expected to generate. The guidance provided in the Mortgagee Letter will assist appraisers to more accurately determine the market value of a property with an ADU and also will help advance the maturation of ADU valuation, thereby increasing access to ADU financing in California as more cities and states remove zoning barriers.
New Construction
Add ADUs to the types of improvements that can be financed under FHA’s mortgages for new construction. This allows new homes to be built with ADUs from the ground up, an important source of ADU production in addition to rehabilitating existing structures.
Read the full press release from HUD.gov.
This development is particularly promising for Californians seeking to build ADUs and navigate the state’s evolving regulatory landscape. FHA-approved lenders can immediately implement these policies, promising a positive shift in the availability and accessibility of financing for homes with ADUs. Stay tuned for more updates on how this policy is set to transform the landscape of homeownership and affordable housing in California.
