January 30, 2024
New fed program no remedy for affordability
By David Pendered
Oct. 22 – More dwellings may be built with funding enabled by a new federal regulation, but there’s no reason to expect any such units built in metro Atlanta to be affordable.
The Biden administration has announced a new program that aims to induce construction accessory dwelling units as part of its efforts to increase the nation’s supply of housing. The regulation does not have requirements regarding affordability of units built with proceeds of the program.
The program authorizes the Federal Housing Administration to allow lenders to count rental income from accessory dwelling units when underwriting a mortgage. Previously, FHA allowed only rental income from a duplex to count toward household income.
The statement announcing the policy, issued Oct. 16, provided this elaboration:
- “This change allows for the inclusion of rental income from the ADU in the borrower’s qualifying income and would allow more borrowers to qualify for FHA financing for properties with ADUs, including 203(k) Rehabilitation mortgages. ADUs can be rented out to tenants, thereby adding to the supply of housing in a community.”
The 203(k) loan is a mortgage product that enables homebuyers to borrow enough money to repair a decrepit property, including costs for labor and supplies.
The new ADU lending standard appears to support the administration’s Housing Supply Action Plan. It addresses action plan’s “to help lenders pilot and scale renovation and construction financing for ADUs….”
The new policy takes effect immediately. Provisions highlighted in the announcement include:
- “Allow 75% of the estimated ADU rental income for some borrowers to qualify for an FHA-insured mortgage on a property with an existing ADU. This additional income flexibility will help to increase access to homes with ADUs for homebuyers with limited incomes, allowing them to benefit from the wealth-building opportunity of a property with an ADU.
- “Use 50% of the estimated rental income, for some borrowers, from a new ADU the borrower plans to attach to an existing structure, such as in a garage or basement conversion, to qualify for a mortgage under FHA’s Standard 203(k) Rehabilitation Mortgage Insurance Program. This will enable more homeowners with limited incomes to build ADUs, helping them sustain homeownership and expanding the production of ADUs as rental housing.
- “Include ADU-specific appraisal requirements for appraisers to clearly identify, analyze, and report on ADU characteristics and the estimated rent the ADU can be expected to generate. The guidance provided in the Mortgagee Letter will assist appraisers to more accurately determine the market value of a property with an ADU and also will help advance the maturation of ADU valuation, thereby increasing access to ADU financing as more cities and states remove zoning barriers.
- “Add ADUs to the types of improvements that can be financed under FHA’s mortgages for new construction. This allows new homes to be built with ADUs from the ground up, an important source of ADU production in addition to rehabilitating existing structures.”