Accessory dwelling units, or “ADUs,” are small living spaces, separate from the main home, that can be rented out to tenants. Helping bring a steady income to owners, while also easing the housing shortage, ADUs are a popular option all across the country, especially here in California.
But there are rules. Local laws dictate how you can build and rent an ADU, and mortgage organizations have guidelines for these structures as well.
Fannie Mae ADU Guidelines: The Most Important Information You Need to Know
The Fannie Mae guidelines are fairly straightforward, clear, and simple. At least compared to guidelines written by other organizations, Fannie Mae is clear and fair on what they allow and what they don’t.
Fannie Mae Guidelines Only Apply to Homes with Conventional Loans
It’s important to remember that these rules only apply to properties that are currently mortgaged with a Fannie Mae-backed loan. So if you have any properties that are under a different loan, or the property itself has no loan whatsoever, you are free to do as you wish. (As long as “what you wish” does not overstep federal, state, and local regulations.)
However, Fannie Mae is one of the largest organizations in the mortgage and real estate industry. Along with Freddie Mac, which shares many of the same guidelines, Fannie Mae encompasses roughly 62% of all conforming loans according to Bankrate.com. This is a large chunk of the entire mortgage landscape; many borrowers have loans connected to Fannie Mae and don’t even realize it.
There are two situations where the Fannie Mae guidelines apply. First is when you already have a Fannie Mae loan on your home. The second is when you are using a Fannie Mae loan to fund the construction of an ADU.
There’s a good chance that your current or future mortgage falls under the Fannie Mae guidelines. If not, you can ignore these rules. But if your home is under Fannie Mae regulations, don’t worry, it’s still simple and easy to build a unit on your property.
Only One ADU Per Property
Fannie Mae currently allows for only one ADU per property. This means that you can’t go out and build two or three accessory dwelling units, and if your home already has an ADU, you are not able to build another, at least if the loan is in any way connected to Fannie Mae.
This Fannie Mae guideline may be repeated in local regulations. Some cities or counties that allow ADUs limit them to one additional unit per property.
Multiunit Properties Can’t Have an ADU
If you own a multiunit property, such as a duplex, you are unable to build an ADU. The property you own already has units that can be rented out, units that help, in their own way, to ease the housing shortage. Fannie Mae has determined that ADUs on multiunit properties will not be allowed.
ADU Must Be Smaller Than Main Home
The ADU on your property is meant to be a small addition, not a massive add-on. To keep the new units small, Fannie Mae has included language stating that the new unit must be smaller than the main home on the property. They must be “subordinate in size to the primary dwelling,” which is their way of saying that it can’t be larger than the main home. It’s not clear how they determine size, but it’s likely that square footage is the determining factor.
The max size for an ADU is usually around 1,200 square feet or 50% of the living space.
ADU Must Be Accessible On Its Own
One of the defining factors for an ADU compared to renting a room in the home is access. To qualify as an ADU, and to be eligible for Fannie Mae-supported financing, the ADU must have its own “means of ingress.” This simply means that it must have its own door.
If the tenant has to walk through the main home to access the unit, it won’t be applicable as an ADU.
Fannie Mae ADU Guidelines Allow Access to Main Dwelling
While the ADU must have its own access, it can be accessible from the main dwelling as well. Basically, if a unit has two entry points, one directly from the outside and another from the main dwelling, it will qualify as an ADU under Fannie Mae guidelines.
This is, admittedly, basically the same as the previous point. The factor that matters is an outside access. Just know that if your unit has an additional door from the main dwelling, it still qualifies.
Utilities Have to Be Completely Separate
The ADU needs to be separate. This means its own access, but it also means its own water, kitchen, and bathing area. Fannie Mae guidelines state that the ADU must have a separate kitchen, bathing area, and bathroom facilities, as well as a sleeping area. This includes a sink with running water and other modern essentials.
Basically, if the person living in the ADU needs to access the primary dwelling for any purpose, it likely won’t be allowed.
Fannie May Guidelines Allow Modular and Manufactured Homes as ADUs
One of the more surprising bits in the Fannie Mae guidelines is that manufactured and modular homes are allowed. If you have utilities in place (electric, sewer, etc), you can secure a modular or manufactured home to the property and it will count as an ADU. It must, however, be classified as “real property.”
Rental Income Can’t Be Used to Qualify
There are a few loan programs that allow you to qualify for financing using rental income. Essentially, the money you will make off the property in the future can be used as income on your application.
With a Fannie Mae loan, however, this is not possible.
Affordable Financing for Your ADU Construction
ADUs can be a convenient, useful way to create a strong income with your property. However, they can be expensive. Although they are smaller than the main property, building an ADU can cost hundreds of thousands of dollars, depending on what you build, the size of the ADU, and the existing property on which you are building.
For this reason, many homeowners need loans to complete these additional living spaces. If you are considering an ADU for your property, contact our staff and let us help you secure an affordable mortgage for your ADU.
