Great news for anyone currently financing or looking to finance an ADU: the mortgage enterprise Freddie Mac recently changed its rules to allow rental income from an ADU to be included in the income qualification for a mortgage. This means if you are borrowing money to build an ADU, or buying a home with an existing ADU, the ADU’s potential rental revenue can contribute to the income requirements for the mortgage. Until this year, rental income from ADUs couldn’t be used to qualify for a mortgage, which, given the home prices of the Seattle region, has made it difficult for many to justify such a large purchase. With these new Freddie Mac rules, the path to backyard home-ownership becomes much more attainable for many. 

Financing Under Freddie Mac: The Fine Points

Here’s what you need to know:

  • The property where the ADU is (or will be) located must be your primary residence.
  • Up to 75% of the ADU’s rental income can be counted as qualifying income for a mortgage. If the ADU doesn’t have a rental history (say, if you’re building a new backyard home) the loan appraisal will include an evaluation of “fair market rent.” 
  • Qualifying rental income from the ADU can make up to 30% of the total qualifying income for the loan. 
  • The ADU must be legally zoned in order to be rented.

More Flexibility, Greater Value, Increased Income

This is a big win on multiple fronts: homes with an existing ADU on the property will increase in value, as it will be easier for potential buyers to qualify for a larger loan. And homeowners looking to build an ADU will qualify for a renovation loan more easily than they did in the past. 

Finding a Lender

We are always happy to recommend local banks who understand DADUs and can work with you on your specific needs.

MyKabin is not a lender or financial advisor, and this information is not financial advice or a guarantee of eligibility for a mortgage. Speak with an accredited lender about your personal financial needs and options. More information on the Freddie Mac ADU rules can be found here

By |Published On: September 27, 2022|