Trying to Buy? ADU Rental Fees Can Now Be Used as Income to Secure Your Mortgage

Even as cities across the country loosen regulations around accessory dwelling units (ADUs) in an effort to boost housing stock, financing issues still present a major roadblock for homeowners and potential buyers. But this week, the Department of Housing and Urban Development announced new policies that expand mortgage financing options for dwellings that have, or will include, an ADU.

In California, recent ADU policies have catered to existing homeowners. But HUD sees these granny flats, or in-law units, as an opportunity for prospective ones, too. Anyone wanting to purchase a home can now count the rental fee from an ADU as qualifying income when looking to secure FHA loans. The home would either have to have an existing ADU, or a buyer would need to have plans in place to build one when securing the loan.

The initiative aims to make it easier to qualify. For buyers purchasing a home with an existing ADU, up to 75 percent of rental income from the ADU can count toward their income; those wanting to build one can include up to 50 percent of potential rental income. If a buyer is building a home from the ground-up, an ADU can be included in FHA mortgages for new construction.

Importantly, existing granny flats could be rehabbed under this policy. In Chicago, many of its roughly 2,400 ADUs have gone unoccupied since being made illegal more than 50 years ago. According to local news station WTTW, "Coach houses already in existence by 1957 were grandfathered in with one catch: once a unit went unoccupied for a year, it could not be used as a living space again." If the city legalizes ADUs across all neighborhoods, the latest policies could provide a means for homeowners to update and renovate those existing units if they qualify for an FHA 203(k) mortgage, which are specifically for renovations.

California residents who leverage these HUD’s policies also have options: Cities opting into the state’s recently-approved policy that allows homeowners to sell their ADU as a condo unit could see an influx of interested homebuyers choosing to build an ADU for its future market potential.

This new policy was announced as part of the Biden-Harris Housing Supply Action Plan, a five-year legislative and administrative strategy set in motion in 2022 to close the housing supply gap. Its homeownership initiatives include building or rehabbing 400,000 homes through the Neighborhood Homes Tax Credit, as well as a pilot program with $100 million in down payment assistance meant to aid low-wealth and first-generation, first-time homebuyers.

Under this framing, ADUs could play an important role in increasing housing density. But much will hinge on whether federal and local governments can meet these efforts with stronger support for rent control measures if they want the units to make a meaningful impact on the country’s shortage of affordable housing.

Related Reading:

In California, You Can Now Sell Your ADU

Los Angeles Is Giving Away Plans for a Pre-Approved ADU