Written By: Joel Palmer, Op-Ed Writer
A pair of initiatives were announced last week to make getting a mortgage a little easier for some potential homebuyers, as the short-term industry outlook continues to indicate it’s only going to be more challenging to buy a home.
The U.S. Department of Housing and Urban Development, through the Federal Housing Administration (FHA), announced a new policy allowing lenders to count rental income from Accessory Dwelling Units (ADUs) when underwriting a mortgage. The policy took effect on the day of the announcement.
ADUs are small housing units built inside, attached to, or on the same property as a primary residence. FHA defines them as “a single habitable living unit with a means of separate ingress and egress that meets the minimum requirements for a living unit.” ADUs are smaller than the primary residence, but still offers a renter their own private space.
FHA said the change allows more borrowers to qualifying for FHA financing, including 203(k) rehabilitation mortgages. The agency said additional benefits include increasing the housing supply, while helping more first-time buyers, seniors and inter-generational families.
“Increasing the supply of affordable housing and helping families to create generational wealth is what today’s action making it easier to finance an accessory dwelling unit is all about. This is a part of our work to help address the critical shortage of affordable housing in communities across the country and help people increase the value of their homes,” said HUD Secretary Marcia L. Fudge.
The new policies:
Allow 75 percent of the estimated ADU rental income for some borrowers to qualify for an FHA-insured mortgage on a property with an existing ADU.
Use 50 percent 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.
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.
Add ADUs to the types of improvements that can be financed under FHA’s mortgages for new construction.
In another development aimed at first-time homebuyers, Freddie Mac launched DPA One, a program to help lenders find and match borrowers to down payment assistance.
The company said DPA One “aggregates and showcases down payment assistance programs in a single, standardized, insights-rich tool so lenders can quickly and efficiently access and compare programs to help make home possible for more families.”
“Time and again research reveals that the down payment is the single largest hurdle first-time homebuyers need to overcome to attain homeownership. But finding and comparing the many programs and their guidelines is challenging,” said Sonu Mittal, Freddie Mac Single-Family Senior Vice President of Acquisitions. “DPA One delivers a one-stop shop at no cost that brings lenders and their borrowers greater detail and visibility into these programs, while seamlessly connecting the right assistance program with the lender, housing counselors and borrowers who need this assistance the most.”
Lenders and housing counselors can use DPA One to enter client eligibility parameters, compare up to three appropriately matched programs, and download results to share with clients.
DPA One is available immediately at no cost to lenders, housing counselors and down payment assistance program providers. DPA One currently has the down payment assistance programs available for 48 of the 50 state housing finance agencies, including local and municipal programs for the Texas and Minnesota markets. Additional local and municipal assistance programs will be available for Florida, Virginia, California, and Kentucky before yearend, with the remaining local and state programs coming online throughout 2024, Freddie stated.
The announcements came during a week with Fannie Mae’s latest housing and economic data who slightly better conditions for the overall economy, but not necessarily for the housing and mortgage sectors.
“In many ways, the housing market experienced four years of business in a two-year period between mid-2020 and mid-2022,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “With ongoing affordability constraints and rising mortgage rates, much of that activity has essentially been given back. We expect the higher mortgage rate environment to continue to dampen housing activity and further complicate housing affordability into 2024.”
FHA’s announcement on ADUs may have come at an ideal time. Fannie’s data from Desktop Underwriter showed the median debt-to-income ratio on approved loans in June and July was 41.7 percent. Since then, mortgage rates have risen to the point where the median DTI on those same loans would be 44 percent. Fannie concluded that many of those loans would no longer qualify under typical DTI thresholds, assuming no other changes to documented incomes.
However, if some borrowers take advantage of the ADU rules, they may be able to lower than DTI for FHA loans.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
