Understanding the New FHA Guidelines on Rental Income and ADUs in Pennsylvania

Today, we’re here to help you understand the new FHA guidelines on rental income and Accessory Dwelling Units (ADUs) in Pennsylvania. The Federal Housing Administration (FHA) has recently made some significant changes with the recently released Mortgagee Letter 2023-17 that could impact your home financing journey. These changes include revisions to rental income policies, property eligibility, and appraisal protocols for ADUs. If you’re a homeowner, potential buyer, or a real estate professional, these updates could bear significant implications for you. So, let’s dive in and unpack what these new guidelines mean and how they can affect your next steps in the world of real estate. Let’s break it down.

Why This Matters

Before we dive into the nitty-gritty, let’s talk about why this Mortgagee Letter is so important. These new guidelines could open doors for many potential homeowners by allowing rental income from ADUs to be considered in mortgage underwriting for a purchase of a home. This is a big deal, especially in today’s housing market where every bit of income counts.

What is an Accessory Dwelling Unit

An Accessory Dwelling Unit (ADU) is a secondary housing unit that shares the same lot as a primary residential structure. ADUs, often referred to as “in-law suites” or “granny flats,” can be detached from the main house (like a backyard cottage), attached to the main house (like a basement apartment), or carved out from the existing space inside the house.

ADUs offer numerous benefits and serve various purposes. They can provide affordable housing options in areas with high real estate prices, allow homeowners to generate rental income, or offer a separate living space for extended family members. As more cities update their zoning laws to allow for ADUs, these units are becoming an increasingly popular solution for urban density and affordability issues.

Key Changes You Need to Know

Immediate Effectiveness

First off, these changes are effective immediately. So, if you’re in the process of applying for an FHA loan, these revisions could apply to you right now.

Who is Affected

The changes apply to FHA Single Family and Home Equity Conversion Mortgage (HECM) programs. So, if you’re looking into either of these, pay close attention.

Rental Income Policies

Inclusion in Effective Income

Previously, the FHA did not allow income from ADUs to be included in the borrower’s Effective Income. This has now changed, making it easier for borrowers to qualify for a loan.

Documentation and Calculation

The guidelines for documenting and calculating rental income have been updated. If you don’t have a history of rental income, you’ll need an appraisal showing fair market rent and, if available, prospective leases. The income will be calculated using 75% of the lesser of the fair market rent or the rent in the lease.

The amount of the rental income from an ADU used as effective income must not exceed 30% of the total monthly effective income used to qualify.

Reserve Requirements

If you’re using rental income to qualify, you’ll need reserves equivalent to two months’ PITI (Principal, Interest, Taxes, and Insurance and PMI) for one-unit properties with an ADU. Make sure you’re prepared for this.

About Us

At Innovative Mortgage Brokers we are committed to helping homeowners navigate the world of mortgages in Pennsylvania and Florida, along with the Accessory Dwelling Units (ADUs). We understand that ADUs can serve as a significant asset, whether for generating additional income or offering a separate living space for extended family. However, financing and planning for an ADU can be a complex process. That’s where we come in. Our team is equipped with the knowledge and resources to guide you through every step of the ADU financing process.

We offer customized loan programs designed specifically for ADU projects. Whether you’re looking to build a new ADU, convert an existing structure, or refinance an ADU, we have the right loan product for your needs.

At Innovative Mortgage Brokers, our goal is to streamline the financing process, making your ADU project as simple and stress-free as possible. With our guidance, you’ll be well-prepared to make informed decisions about your ADU project.

At Innovative Mortgage Brokers, we understand that finding the right mortgage can be a complex process. We work closely with our clients to understand their unique needs and financial goals. Whether you’re a first-time homebuyer, looking to refinance, or exploring investment properties, we’ll guide you through all the available and competitive mortgage options. We strive to secure the best rates and terms for your situation, and we’ll be there every step of the way, from pre-approval to closing. Our commitment is to make the mortgage process transparent, straightforward, and tailored to your needs, helping you achieve your homeownership dreams.

Conclusion: What This Means for You

The new FHA guidelines on rental income and ADUs are a progressive step in the right direction. They open up more opportunities for potential homeowners, especially those considering ADUs as a source of additional income. These changes could be a game-changer in making homeownership more accessible. However, like any other financial decision, it’s crucial to understand these guidelines thoroughly and consider how they apply to your unique situation. At Innovative Mortgage Brokers, we’re committed to helping you navigate these changes and make informed decisions. Please feel free to reach out for any questions or concerns you may have about these new guidelines and how they might affect your mortgage process.