An Accessory Dwelling Unit (ADU) is a secondary housing unit on a single-family residential lot. It is often referred to as a granny flat or in-law suite and functions on its own – this means a separate entrance, plus a kitchen (with cabinets, countertop, sink, and stove), a bedroom, and a bathroom.
If you’re buying a home with an ADU and using a conventional loan, here’s how it is taken into account for mortgage financing purposes:
What Is Allowed
- Only One ADU Permitted – Conventional financing allows an ADU on single-family residences, two-unit, and three-unit properties
- Must Be Smaller Than the Main House – The ADU cannot be larger than the main property. It should be the smaller of the two structures
- Must Be Legal/Permitted – The ADU must follow local zoning regulations. If it’s not legal, it could qualify as a 1-unit property. This is only if your appraiser and lender are on board
- Can Be Attached or Detached – A converted garage, basement unit, or a small cottage all count as long as there’s an outside entrance if attached to the main property
What Is Not Allowed
- More than One ADU on the Property – If there is more than one unit, that is not permitted with Fannie Mae
- If it’s Not Classified as an ADU – The appraiser must decide that the ADU is best used as a small extra living space, not as a second full-sized home, or just a storage area
- Unpermitted Units – If the ADU doesn’t follow the city’s rules, it might not be allowed. Always check first to make sure it’s legal
Some people use manufactured homes (a type of mobile home) as their ADU. This is allowed if it is at least 400 square feet, considered property (and not a trailer), and was built after 1976
Using Rent From the ADU Towards a Loan
If you plan to rent out the ADU, it’s possible to use that money to help qualify for the loan for certain programs/occupancy. You will need to show proof, like a rental agreement, and will also need a report from the appraiser.
ADUs are great guest houses, rental units, or homes for a family member. Just make sure the extra unit legally follows the guidelines and is approved by your lender and appraiser.
If you’re thinking about buying in the next year or adding a guest house to your backyard, give us a call to speak to one of our Mortgage Loan Originators at (760) 930-0569. We’re here to talk through your goals and help you figure out which loan programs could be the perfect fit for your needs.
