Update
Effective with the release of ML 2023-17 by HUD, rental income from an ADU is allowable. This income can be used for tenants of an ADU.
Accessory Dwelling Unit
An Accessory Dwelling Unit (ADU) refers to a single habitable living unit with means of separate ingress and egress that meets the minimum requirements for a living unit as shown below. An ADU is a private space that is subordinate in size and can be added to, created within, or detached from a primary one-unit Single Family dwelling.
Note – If a renter lives in the primary unit, they are considered a boarder and different guidelines are applied.
Minimum Requirements for Living Unit
The minimum requirements for a living unit include:
- a continuing and sufficient supply of safe and potable water under adequate pressure and of appropriate quality for all household uses;
- sanitary facilities and a safe method of sewage disposal. Every living unit must have at least one bathroom, which must include, at a minimum, a water closet, lavatory, and a bathtub or shower;
- space adequate for healthful and comfortable living conditions;
- heating adequate for healthful and comfortable living conditions;
- domestic hot water;
- electricity adequate for lighting and for mechanical equipment used in the living unit; and
- kitchen facilities adequate for the preparation and cooking of food. Every living unit must have at least one area with kitchen facilities, which must include, at a minimum, a sink with potable running water and a stove utility hookup.
History of ADU Rental Income from the Subject Property
Where the borrower has a history of ADU rental income from the subject property since the previous tax filing, the mortgagee must verify and document the existing rental income by obtaining the existing lease, rental history over the previous 24 months that is free of unexplained gaps greater than three months (such gaps could be explained by student, seasonal or military renters, or property rehabilitation), and the borrower’s most recent tax returns, including Schedule E, from the previous two years. For properties owned less than two years, the mortgagee must document the date of acquisition by providing the deed, closing disclosure, or other legal document.
Limited or No History of ADU Rental Income
Where the borrower does not have a history of ADU rental income from the subject property since the previous tax filing, the mortgagee must verify and document the proposed rental income by obtaining a Fannie Mae Form 1004/Freddie Mac Form 70, Uniform Residential Appraisal Report (URAR), and a Fannie Mae Form 1007/ Freddie Mac Form 1000, Single Family Comparable Rent Schedule, showing fair market rent and, if available, the prospective lease.
NOTE:
For borrowers with limited or no history of ADU income, the amount of the rental income from an ADU used as effective income must not exceed 30% of the total monthly effective income.