FHA makes it easier to finance accessory dwelling units in hopes of boosting homeownership

The U.S. Department of Housing and Urban Development (HUD) announced a new policy that allows borrowers to count income from accessory dwelling units (ADU) when they apply for a mortgage. 

The new policy for ADUs allows for the inclusion of both existing rental income for ADUs and prospective rental income to be included in the underwriting process to allow more borrowers to purchase properties with ADUs, rehab existing houses, add ADUs and construct new homes with ADUs, Federal Housing Commissioner Julia Gordon said the MBA Annual Conference in Philadelphia on Monday.

 The change will allow more borrowers to qualify for Federal Housing Administration (FHA) financing for properties with ADUs, including 203(k) Rehabilitation mortgages.

"This not only helps more people qualify for homeownership, it helps them to build the wealth that we know often comes from homeowners who buy a home with rental units, and that helps to increase wealth," Gordon said. "It also helps to boost the supply of affordable housing in many of the neighborhoods where it's most needed and least available."

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White House addresses affordability with new initiatives

The Biden administration has made housing supply a priority and has invested over $12 billion in support to help first-time homebuyers, according to a White House statement. The ADU announcement is part of the administration's pledge to aggressively increase homeownership opportunities.

"FHA's new policies will increase the ability of homebuyers across the nation to obtain access to affordable mortgage credit when seeking to purchase properties with ADUs, add ADUs to existing structures, or construct new homes with ADUs," the White House said. "The flexibilities will help more first-time homebuyers, seniors and inter-generational families leverage ADUs to build generational wealth through homeownership while creating new affordable housing in their communities."

Also announced is the United States Department of Agriculture (USDA) plans to allocate an additional $9 million in loans to nine Native American Community Development Institutions as a part of its efforts to increase access to homeownership for Native Americans on Tribal Lands through a re-lending demonstration program.

HUD, through FHA, is working on updates to the 203(k) Rehabilitation Mortgage Insurance Program to help homebuyers and homeowners finance the purchase or refinance of homes needing improvement. FHA is considering potential policy changes that could increase the funds available to borrowers to make renovations and repairs. Other policies under review permit more time for the completion of those improvements. 

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The U.S. housing market is suffering a supply shortage

A general affordability problem has hampered housing activity as Americans struggle with high home prices and soaring mortgage rates. Borrowers are either taking a wait-and-see approach on mortgage rates or can't qualify to borrow, leaving many sidelined, MBA Deputy Chief Economist Joel Kan said this week at the Annual Conference in Philadelphia. However, the housing supply shortage is why borrowers willing to buy can't.

"It is really the lowest or close to the lowest it's ever been," Kan said. "A lot of that has been driven by what we call that lock-in effect. So many borrowers have lower mortgage rates than what's available right now that they're just not willing to sell or not willing to list their homes and staying in the house with a 3% mortgage rate, waiting to see how the market might change in order to list and maybe entertain a new purchase somewhere else."

New home sales have boomed as the existing housing supply slowed. The newly constructed share of inventory has risen to about 30% of all homes available for sale. That number is typically in the 8% to 10% range, Kan said.

Homebuyers can find the best mortgage rate by shopping around and comparing your options. Visit Credible to compare rates from different lenders without affecting your credit score.

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