The U.S. Department of Housing and Urban Development (HUD) has recently introduced a significant policy change that promises to empower homeowners and promote housing affordability. This groundbreaking alteration allows the income generated from Accessory Dwelling Units (ADUs) to be considered when underwriting a mortgage. ADUs, sometimes referred to as granny flats, in-law suites, or backyard cottages, are secondary dwellings located on the same property as a primary residence. This shift in HUD’s approach has the potential to revolutionize how Americans utilize their properties and can play a pivotal role in addressing the affordable housing crisis.

The Growing Popularity of ADUs

ADUs have been on the rise as a creative solution to the increasing demand for affordable housing. They offer homeowners the opportunity to maximize the utility of their properties while providing potential housing options for family members, renters, or anyone in need of more affordable housing. ADUs come in various forms, from converted garages to purpose-built structures, and are typically equipped with their own kitchens, bathrooms, and living spaces. Over the past few years, ADUs have gained popularity due to their cost-effectiveness and potential for generating additional income through rental.

A Game-Changing Policy Shift

HUD’s decision to incorporate ADU rental income into the mortgage underwriting process is a groundbreaking move. Traditionally, when applying for a mortgage, the primary source of income taken into consideration has been the borrower’s own earnings. Rental income, especially from ADUs, was often viewed as secondary or supplemental income, and its potential to boost an applicant’s eligibility for a mortgage was often overlooked.

The new policy now recognizes the value of income generated from ADUs. This income will be considered when evaluating a borrower’s ability to pay their mortgage, making homeownership more attainable for many who might have previously struggled to qualify based on their primary income alone. This shift aligns with the changing landscape of homeownership, where utilizing property as a source of rental income has become increasingly common.

The new policies allow for 75% of the estimated ADU rental income from some borrowers to be used for qualifying for FHA loans. If the ADU is proposed, 50% of the estimate rental income can be calculated.

Benefits for Homeowners

This policy change offers several tangible benefits for homeowners:

Enhanced Borrowing Capacity: Homeowners with ADUs will have an expanded financial resource that can be included in the mortgage application process. This added income can substantially boost their borrowing capacity.

Improved Affordability: The increased borrowing capacity can make homeownership more affordable for individuals and families who would otherwise struggle to qualify for a mortgage, thereby addressing the issue of housing affordability.

Encouragement for ADU Construction: The policy change could incentivize homeowners to invest in building ADUs on their properties, as they can now view these units as potential sources of income that contribute to their overall financial stability.

Support for Aging in Place: ADUs also offer a practical solution for multigenerational living, allowing seniors to age in place or providing living space for young adults who have yet to secure their own homes.

Impacts on the Housing Market

By integrating ADU rental income into mortgage underwriting, HUD’s policy shift is likely to have significant impacts on the housing market:

Increased Demand for ADU Construction: As homeowners recognize the potential for increased rental income and financial stability, there could be a surge in the construction of ADUs, helping to meet the growing demand for affordable housing.

Expanding Homeownership Opportunities: More people, including those with limited incomes, may gain access to homeownership, thus expanding the pool of potential buyers.

Positive Economic Effects: A thriving ADU market could stimulate local economies, as construction, real estate, and property management sectors see increased activity.


HUD’s decision to consider income from ADUs in mortgage underwriting is a significant step towards addressing the affordable housing crisis in the United States. It recognizes the evolving landscape of homeownership and encourages the use of ADUs as income-generating assets. By unlocking the potential of ADUs, this policy change will empower homeowners, boost housing affordability, and promote creative solutions to the nation’s housing challenges. It’s a forward-thinking initiative that promises to make the dream of homeownership more attainable for countless Americans while also encouraging innovation in housing development.

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