Homeowners Recognized as Part of the Solution

There’s some good news on the horizon for affordable housing in markets currently bereft of such opportunities. In mid-October, the Federal Housing Administration (FHA) announced a change in housing finance policy that will make it easier for people to build accessory dwelling units (ADUs).

The new policy allows homeowners, for the first time, to list projected rental income of an ADU when applying for a mortgage to build one. The policy applies to mortgages that are insured by Fannie Mae and Freddie Mac. The previous policy only recognized rental income in duplex structures.

Why This is Good News

Construction of ADUs — also known as granny flats, in-law suites, and garage tiny homes —have increased across the country over the past few years. Many cities and states have rolled back some zoning policies to make it easier for these types of residential units to be built. But although it was easier to build them, obtaining the financing to build them was a huge hurdle.

Depending on the area of the country and the type of project, ADU construction can cost anywhere from $100,000 to $400,000 — prohibitive to many first-time homebuyers, older adults, and intergenerational families. HUD Secretary Marcia L. Fudge praises the new policy, saying that it will help people leverage ADUs to build generational wealth through home ownership and help create new affordable housing in their communities.

The new policy is geared to helping address the current shortage of affordable housing while at the same time helping homeowners increase the value of their own homes. It helps close the gap between people who want to build “missing middle” construction like ADUs and the ability to finance such projects.

How the New Policy Works

According to the FHA, some borrowers will be able to:

  • Allow 75 percent of the estimated ADU rental income to qualify for an FHA-insured mortgage on a property with an existing ADU.
  • Use 50 percent of the estimated rental income from a new ADU that will be attached to an existing structure — e.g., a garage or basement conversion.

Additionally, the new policy:

  • Includes ADU-specific appraisal requirements to help appraisers identify, analyze and report on ADUs and the estimated rent an ADU is expected to generate
  • Adds ADUs to the types of improvements that can be financed under FHA mortgages for new constructions. In other words, it allows new homes to be built with ADUs, a second source of ADU production in addition to rehabilitating current structures.

The Fine Print

In general, everyone who offers FHA 203(k) products (a specific type of federally-supported mortgage) will be able to take advantage of the new policy.

The caveat is this: the policy only applies to ADUs that are part of a conversion or attached project. The policy doesn’t apply to borrowers who want to build a detached ADU alongside an existing home. And since that’s exactly what many people want to build, it’s a current downside to the new policy.

More Work To Be Done

Many advocacy experts are pushing for the FHA to further expand its policies to include detached ADU construction. “We need to keep calling for congressional action to include detached new construction ADUs,” Ryan O’Connell, founder of How to ADU — an ADU advocacy company based in California — told Business Insider.

To realize the full potential of ADUs as a mechanism to increase supply and support various aging-in-place models, detached units need to be Fannie and Freddie approvable loans. Our advocacy for broadening this financing tool’s availability is also advocacy that enhances inter-generational wealth transfer. 

The ability to use portions of vacant land on one’s house lot to build a new modest-scaled home, allows an owner to enhance the value of the property they may have owned for decades. Done carefully and tastefully, the family homestead can become the family nest-egg, as well as bring more housing inventory to the community.

As always, advocacy works. And the more of us who advocate, the louder our voice becomes. It’s up to us to create our best Third Chapter lives.

Third Chapter Living celebrates, challenges, informs and promotes conversations about housing issues affecting the Baby Boomer Generation. Check out our website to learn more about our work on aging in place options. The author, Reese Fayde, is a dedicated problem solver and skills development coach. She’s passionate about working with change-makers — individuals committed to transforming the status quo, whether it’s in their industry, community, or organization.

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