FHA adds ADU income to reverse mortgage eligibility criteria

The agency had indicated the potential for this policy earlier this year, making it official on the heels of a wide-ranging White House announcement of new housing policies

The Federal Housing Administration (FHA) on Monday published Mortgagee Letter (ML) 2023-17, which establishes guidelines for consideration of rental income in underwriting forward mortgages and performing the financial assessment for Home Equity Conversion Mortgages (HECM) loans.

FHA programs have previously allowed for the purchase, rehabilitation or refinance of a property that included a single ADU, but did not allow income from an ADU rental to be included in the consideration FHA mortgage financing qualification. Now, that has changed to be in greater alignment with the Biden administration’s housing and wealth establishment goals, the ML said.

“FHA recognizes that ADUs can serve to enhance the generational wealth-building potential of homeownership,” the ML said. “Additionally, ADU rental income can contribute to mortgage payments and help Borrowers sustain long-term homeownership.”

HUD Secretary Marcia Fudge, who oversees the department that administrates the reverse mortgage program for the Biden administration.
Marcia Fudge

“Increasing the supply of affordable housing and helping families to create generational wealth is what today’s action making it easier to finance an accessory dwelling unit is all about,” said HUD Secretary Marcia Fudge in a statement. “This is a part of our work to help address the critical shortage of affordable housing in communities across the country and help people increase the value of their homes.”

In support of its housing inventory and wealth-expansion goals, “FHA is updating its appraisal protocols, underwriting requirements, and HECM financial assessment guidelines” to allow for ADU rental income to be one factor of consideration for someone aiming to qualify for FHA-insured mortgage financing, the ML explained.

“FHA is also updating its property eligibility guidelines for the type of improvements eligible under the Standard 203(k) Rehabilitation Program and property types eligible for New Construction as it relates to ADUs,” the letter added.

The updated HECM Financial Assessment policy says that “rental income from the subject property may be considered effective income when the property is a one-unit dwelling with an [ADU] or a two- to four-unit dwelling,” the ML stated. “No income from commercial space may be included in rental income calculations. Required documentation varies depending upon the length of time the borrower has owned the property.”

The new ADU policy was announced alongside a series of other sweeping new housing policies from other federal agencies including the Consumer Financial Protection Bureau (CFPB0, The U.S. Department of Agriculture (USDA), the U.S. Department of Veterans Affairs (VA) and data from the U.S. Department of the Treasury.

Roughly six months ago, FHA announced that it was looking at the possibility of adding ADU rental income to consideration under the HECM Financial Assessment. FHA Commissioner Julia Gordon said at the time that “an updated policy has the potential to expand opportunities for low- and moderate-income homeowners to benefit from the wealth-building potential of ADUs while supporting the affordable housing needs of their communities.”

The National Reverse Mortgage Lenders Association (NRMLA) submitted comments to the FHA in support of the proposal a couple of weeks later, saying in a comment letter that ADUs have a lot of potential utility, particularly for seniors who wish to age in close proximity to their loved ones.

The inclusion of ADU rental income when assessing a borrower’s HECM loan eligibility could “more realistically” calculate a borrower’s income, the association said, and prudently expand HECM program eligibility.

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