The Federal Housing Administration (FHA) unveiled a preliminary version of a Mortgagee Letter (ML) that would factor in the income generated from accessory dwelling units (ADUs) when assessing eligibility for FHA financing. The plan would necessitate revisions to the FHA’s appraisal procedures and underwriting criteria, and would additionally amend the financial evaluation of the Home Equity Conversion Mortgage (HECM) initiative to account for rental income from ADUs.
The FHA stated that if the policy outlined in the preliminary Mortgagee Letter (ML) is implemented, individuals seeking FHA financing for a property with an ADU would be allowed to utilize the real or estimated rental revenue from the ADU to fulfill FHA income criteria. The announcement specified that the draft ML recommends guidelines for underwriting ADU rental income and for assessing and documenting the ADU’s market rent in FHA appraisals.
Furthermore, the preliminary Mortgagee Letter (ML) also recommends guidelines for adding ADUs to the list of qualified enhancements covered by the 203(k) rehabilitation mortgage insurance initiative. The draft ML also proposes to include ADU rental income in the borrower’s financial assessment for a HECM loan.
According to FHA Commissioner Julia Gordon, “FHA is leading the Administration’s initiatives to enhance housing availability and affordability.” She stated that, given the growing appeal of ADUs across the United States and the limited housing supply, an updated policy has the potential to offer low- and moderate-income homeowners more opportunities to take advantage of ADUs’ wealth-building potential while meeting their communities’ affordable housing needs.
ADUs, also known as “in-law suites” or “granny flats,” are gaining popularity among older Americans. These units are auxiliary living spaces that are constructed on properties containing larger, primary units.
Earlier this year, the New York Times featured an article explaining how a reverse mortgage could be utilized to finance the construction of ADUs. This option would only be viable if the homeowner of the primary residence obtained the reverse mortgage and had no intention of residing in the ADU.
As per the new guidelines, a borrower with a reverse mortgage who has an ADU occupied by a tenant would be able to factor in the rental income as part of their HECM loan assessment.
Individuals who are interested can access the preliminary Mortgagee Letter (ML) on the FHA’s single-family “drafting table,” where they can also obtain information on how to submit their comments to the agency for consideration.
