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Fannie Mae ADU (Accessory Dwelling Unit) Guidelines: What You Need to Know

Accessory dwelling units, or “ADUs,” are seen as a useful way to create a sizable income while easing real estate shortages across the country. But there are a few ADU guidelines you should understand.

An ADU could bring thousands of dollars in regular income. According to Apartment List, the average rent for a single-bedroom apartment in San Diego was, at the time of this writing, $3,093. It seems reasonable that an ADU would bring a similar price. While many governments and lending groups have eased their regulations, ADU guidelines must be respected if you’re going to build an additional space on your property. Fortunately, these guidelines are fair, reasonable, and, in most cases, easy to meet.

ADU Guidelines in California, San Diego, and the U.S.

NOTE: The rules, regulations, and guidelines for ADUs in the U.S. and states like California are always changing, so you need to research the laws in your area and check the most recent updates from governments to ensure you understand the current guidelines. Because of changing laws, the information in this article could be outdated by the time you read it.

Fannie Mae, one of the largest organizations in the real estate and mortgage industry, currently provides general ADU guidelines for properties all across the country. These create a good foundation for understanding ADUs, and, even if you are not using a Fannie Mae loan, they help you grasp the general requirements for an ADU.

First of all, only one ADU is allowed on the property. This means that you cannot create multiple ADUs on the property; you are limited to one. Building an ADU is also not permitted on a multiunit property, such as a duplex.

According to Fannie Mae, the ADU must be “subordinate in size to the primary unit.” In simple terms, the ADU must be smaller than the existing house. This is usually not an issue, as ADUs are generally much smaller than the main home.

One of the main requirements is that your ADU must have a working kitchen.

An ADU must also have specific features, all of which must be separate from the main property. These include:

  • A “means of ingress.” This simply means that the ADU must have its own entry and exit that is separate from the main home. You should not have to walk through the main dwelling to access the ADU.
  • A kitchen. By their definition, a kitchen must have at least cabinets, countertops, a sink with running water, a stove or stove hookups. Fannie Mae mentions that microwaves and toasters are not acceptable replacements for stoves.
  • A sleeping area. Essentially there needs to be a separate space that serves as a bedroom. It’s not entirely clear if this area can be an open space, such as a studio apartment.
  • A “bathing area” as Fannie Mae calls it. We take this to mean that there must be a shower or tub for washing.
  • “Bathroom facilities,” including a functional toilet and sink with running water.

These are the ADU guidelines from Fannie Mae, and they generally align with the typical guidelines from other organizations, including governments and other mortgage groups.

Recent Changes to ADU Laws in California

A little over a year ago, the state of California began overhauling their ADU regulations to allow more of these facilities to be built. California was, and still is, experiencing a significant housing shortage, a shortage that was linked to a variety of problems, including soaring home prices and (potentially) an increase in homelessness.

To ease this problem, the state government redefined the rules that regulate ADUs. Specifically, they made it more difficult for local governments (county, city, etc) to create rules that limit the building of ADUs. Essentially, the state government now prohibits local city councils and mayors from imposing strict requirements that exceed state law. For example, local governments cannot impose a minimum requirement on lot size, as there is no minimum requirement in the state code.

We won’t dive too deep into the details, but the California laws also provides greater flexibility for size and other requirements while allowing typical and “junior” ADUs on the same property. (A junior ADU or “JADU” may be built inside the walls of an existing home and does not need an interior entry.)

The state law now allows ADUs on multifamily properties, such as a duplex. This is an important detail that puts California more in line with Fannie Mae’s ADU guidelines.

Overall, ADUs are becoming a popular choice here in California as well as across the country. State and local governments, prompted by community support, are allowing more of these properties to hopefully ease the housing shortage while creating an income for property owners.

Need Help Paying for Your ADU?

ADUs can bring a sizable payment to your monthly income, but they are not cheap to build. With the cost of materials and labor, creating an ADU can cost well over $100,000, even as much as $500,000 depending on the size and scope of your project. To pay for these additions, many homeowners need financing. Fortunately, there are a variety of options available.

Cash-Out Refinancing

If you have significant equity in your property but have a loan with a high interest rate, a cash-out refinance could be the right option. With this choice, you’ll refinance your loan while getting a lump-sum payment that can be used for building an ADU. Essentially, this option turns home equity into cash that can be used for the ADU.

HELOC or Home Equity Loan

A HELOC, which is a line of credit, and a home equity loan, which is a straightforward loan, are both useful ways to generate financing for an ADU. They both require a fair amount of equity, but, when all is done, you will have a second loan on the property. This is different than a cash-out refinance, which wraps the home loan and the ADU financing (the cash) into one payment.

Construction Loan

If neither of these options seem ideal, you could use a simple construction loan to support the ADU. These loans allow you to build a new structure on the property, but financing can be slightly more complex. You’ll likely need estimates and other information from a licensed contractor before the loan will be approved.

If you want to learn more about financing options for ADU or the basic ADU guidelines for construction loans, contact our team today!