FHA expands policies to boost financing for homes with ADUs

The Federal Housing Administration and the U.S. Department of Housing and Urban Development on Monday announced policy revisions intended to increase lending and construction for properties with accessory-dwelling units.

Among the revisions is a change that would allow 75% of estimated rental income coming from an existing single unit on a mortgaged property be included in underwriting criteria for FHA-guaranteed loans. Presently, this income is not included when determining borrower eligibility.

"The new policies provide greater flexibility for the use of rental income from ADUs, which will help more borrowers qualify for FHA-insured financing on homes with ADUs," said HUD deputy assistant secretary for single-family housing Sarah Edelman. "We're pleased that we've had such widespread support from the housing industry — support that has helped us deliver this meaningful solution for the nation's home buyers."

Additionally, 50% of estimated income coming through an ADU rental can be considered in underwriting for the FHA's Standard 203(k) Rehabilitation Mortgage Insurance Program, which would permit the construction of a proposed unit. 

A third update will add ADUs to the list of improvements eligible for financing of FHA new-construction loans, allowing them to be built from the ground-up and grow rental supply. Guidance is also being revised to include ADU-specific instructions for appraisers to identify and report on characteristics of units and the rent they might be able to generate. 

The rule changes are meant to expand available inventory and "address the critical shortage of affordable housing in communities across the country and help people increase the value of their homes," according to HUD Secretary Marcia Fudge. 

They are also aimed at decreasing long-standing homeownership and income gaps between minority and white populations, increasing wealth-building opportunities for first-generation home buyers. 

"With our new ADU policy, we'll help households of more modest means maximize the potential benefits of homeownership to build wealth," said Julia Gordon, FHA commissioner and HUD'S assistant secretary for housing. "This new policy also contributes to the supply of affordable housing in many neighborhoods where it's most needed and least available."

HUD said it would welcome feedback on the new policies for a period of 30 days after issuance.

The FHA's changes come a little more than a year after Freddie Mac adopted broader underwriting criteria on loans it guaranteed that funded similar properties but left several restrictions in place. Previous research has found a majority of the public in favor of accessory-dwelling units as a possible solution to inventory shortages across much of the country, but government efforts to enact initiatives have als encountered local opposition thwarting plans.

The Biden administration has listed increased housing supply among its domestic priorities, and HUD's policy changes were included in an update of the president's action plan to address homeownership, which was also released on Monday.