FHA Seeks Feedback on ‘Granny Flats’ Affordable Financing Access

(A pre-approved accessory dwelling unit by Connect Homes, courtesy Los Angeles Department of Building and Safety.)

The Federal Housing Administration last week issued a draft proposal seeking feedback to its requirements for insuring mortgages on single-family homes with Accessory Dwelling Units, popularly known as “granny flats.”

The proposal adds additional flexibility in calculating market rent and in using ADU rental income to qualify for FHA-insured mortgage financing. If finalized, these updates would allow more borrowers to qualify for FHA financing for properties with ADUs, including 203(k) renovation loans.

“At a time when housing supply is constrained and ADUs are gaining popularity nationwide, an updated policy has the potential to expand opportunities for low- and moderate-income homeowners to benefit from the wealth building potential of ADUs while supporting the affordable housing needs of their communities,” said FHA Commissioner Julia Gordon.

FHA describes ADUs as small units of housing built inside, attached to, or on the same property as a primary residence. FHA programs currently allow for purchase, rehabilitation or refinance of properties that include ADUs. FHA does not, however, currently allow for the inclusion of rental income from the ADU in the borrower’s qualifying income.

ADUs have become growingly popular in urban areas such as Los Angeles, which has long-suffered a lack of affordable housing. In 2020, Los Angeles launched a program with more than a dozen preapproved designs from top architects for backyard dwellings, cutting the bureaucracy involved, allowing units to be attached to an existing house or detached as a separate structure on any lot zoned for residential use. These units can be legally rented.

The full set of proposals are contained in a draft Mortgagee Letter posted for public feedback on FHA’s Single Family Housing Drafting Table web page. FHA said it will accept feedback on its draft policy through April 27.