Many homeowners are turning to an accessory dwelling unit (ADU) as an affordable solution when it comes to creating more space in their existing property. In response, the Federal Housing Administration (FHA) is working on guidance to allow homeowners to use FHA’s insured mortgage products to finance the construction and acquisition of these units.

The FHA’s guidance will provide lenders and servicers detailed information about recognizing and approving these types of projects. It will provide clarification that the FHA is willing to insure these standard types of financing transactions with an ADU included in the purchase or refinance transaction. This guidance will also require lenders to meet certain basic construction-related conditions prior to insuring a loan.

The effort by the FHA to expand financing in the real estate market to include ADUs in transactions is part of the Obama administration’s Housing Opportunities Through Modernization Act passed in 2016. This act is meant to make it easier for some FHA borrowers to secure financing.

The FHA’s expansion of the financing process to include ADUs will create new opportunities for homeowners to utilize their existing property space more effectively, while at the same time providing lenders and servicers a comprehensive set of guidelines to help them properly appraise, insure and service these loan products. As a result, more opportunities for homeowners to create or purchase an ADU for additional living or rental space may become available, making it easier for communities across the country to access and support housing affordability.

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