Proposed FHA guidance for homes with ADUs includes HECMs

FHA includes the HECM program in a new draft Mortgagee Letter expanding financing for homes with ADUs

The Federal Housing Administration (FHA) released a draft Mortgagee Letter (ML) on Thursday to include accessory dwelling unit (ADU) income in the consideration of FHA financing. The proposal would require updates to the FHA’s appraisal protocols and underwriting requirements, but would also modify the Home Equity Conversion Mortgage (HECM) program’s financial assessment to include ADU rental income.

“With the proposed policy provided in this draft ML, prospective borrowers financing a property with an ADU will be able to use the actual or projected rental income from the ADU to help meet FHA income guidelines,” the FHA said in its announcement. “Specifically, this draft ML proposes policy on underwriting rental income from an ADU and for the analysis and reporting of ADU market rent in FHA appraisals.”

The draft ML also proposes policy for adding ADUs to the improvements eligible for the 203(k) rehabilitation mortgage insurance program and the inclusion of ADU rental income as part of a borrower’s financial assessment for a HECM loan.

“FHA is at the forefront of the Administration’s efforts to increase housing supply and affordability,” said FHA Commissioner Julia Gordon in a statement. “At a time when housing supply is constrained and ADUs are gaining popularity nationwide, 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.”

ADUs are becoming increasingly popular for older Americans. The structures — which are secondary living spaces that are built on properties with larger, primary units — are even sometimes referred to as “in-law suites” or “granny flats.”

A story published in the New York Times earlier this year described how a reverse mortgage could help fund the construction of ADUs if taken out by the primary residence’s owner and the owner is not planning to live in the ADU itself.

Under this new guidance, a reverse mortgage borrower who has an ADU rental with a tenant could include the related rental income in consideration for their HECM loan.

Interested stakeholders can view the draft ML at FHA’s single-family “drafting table,” where they can also find instructions on how to submit their comments for consideration to the agency.

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