Give us a call at 303.779.0591

FHA’s New ADU Underwriting Guidelines

FHA’s New ADU Underwriting Guidelines

A Bright Future for Renters-turned-Investors through FHA’s new announcement for ADU income.

Attention, Millennial and Gen-Z renters! If you’ve been eagerly waiting for a window of opportunity to delve into real estate investment, now might just be your time! With the new FHA underwriting guidelines for ADU financing, you could find yourself taking advantage of some favorable conditions, particularly if you’re looking to explore house hacking as a strategy to amass wealth through real estate.

1. FHA Rental Income and ADU Property Ownership

If you’ve owned a property for less than two years, there are certain protocols that the Mortgagee needs to observe:
– The Rental Income for the period you’ve owned the property must be annualized.
– Proof of acquisition date is essential, be it through the deed, Closing Disclosure, or another legal document.

2. Understanding Boarders and Rental Income for Mortgage Qualification

  • According to FHA guideline changes on ADU financing
    – A Boarder is defined as someone renting space within the Borrower’s Dwelling Unit. It’s crucial to note that renters of an ADU (Accessory Dwelling Unit) aren’t categorized as Boarders.Rental Income earned from these Boarders is only deemed valid if:
    – The Borrower has a two-year record of receiving such income, as reflected on their tax return.
    – The Borrower is still currently receiving this type of income.When it comes to required documentation:
    – The Mortgagee must source two years of the Borrower’s tax returns to corroborate income from Boarders.
    – In the case of purchase transactions, a signed written agreement must be produced to prove the Boarder’s intent to continue residing with the Borrower.

    IMPORTANT: To determine the Effective Income:
    – The lesser of either the two-year average or the existing lease amount will be utilized.

3. General Asset Requirements and Reserves for FHA ADU financing

  • Assets are a pivotal aspect of the borrowing process. With regards to Reserves:
    – The mortgage company has the responsibility to verify and record all assets presented.
    – Reserves are essentially the sum total of the Borrower’s confirmed and recorded liquid assets minus the funds due at closing. Remember, Reserves do *not* encompass:
    – Funds acquired at settlement in cash-out dealings.
    – Occasional cash garnered at settlement in other loan agreements.
    – Equity from a different property.
    – Loaned funds from any source.
  • For properties with nuances:
    – For a single FHA unit possessing an Accessory Dwelling Unit (ADU), if the Rental Income is the Effective Income for the Borrower’s qualification, then the Mortgagee must certify and record Reserves equal to two months’ Principal, Interest, Taxes, and Insurance (PITI) post-closing.
    – As for three to four-unit properties, the Mortgagee is required to confirm and register Reserves equivalent to three months’ PITI after the deal is sealed.

Final Thoughts about FHA announcing this change

As the real estate market continuously evolves, staying updated on the newest guidelines and rules is paramount for prospective investors. Millennial and Gen-Z renters, this is your cue to level up, harness the power of these new FHA guidelines, and pave your way to becoming successful real estate investors! Make sure to check out our blog about buying a duplex with an FHA loanThe Magic of House Hacking: A Duplex & FHA Mortgage Combo If we can help talk through your plans, connect with us!


Share this post:

This field is for validation purposes and should be left unchanged.