Bringing Families Together: Could ADUs Help Millennials Get The Housing They Need?


A recent report from Redfin shows that Baby Boomers with empty nests own double the amount of large homes compared to Millennials with kids. So what if Grandma and Grandpa moved into an accessory dwelling unit and the three generations lived together so everyone could have some space?

According to the report, Millennials with kids own 14% of the nation’s large homes, which are defined as having three or more bedrooms. Baby Boomers living by themselves or with one other person own 28% of these properties.

Partially to blame is affordability. 2023 was the least affordable year for homebuying on record, with median-priced homes costing about $410,000, according to Redfin. Additionally, 54% of Boomers who own homes have no mortgage, so they are reluctant to let go of their lifestyle for financial reasons.

But what if there was a world where everyone could win, with Millennials getting the space they need for their growing families, while their parents age in place with privacy?

Accessory dwelling units could be a solution. According to a September survey conducted by OnePoll, 61% of homeowners cited multigenerational housing as their primary motivation for constructing an accessory dwelling unit.

In addition, accessibility was a key consideration for 73% of homeowners who have an ADU, for the purpose of aging in place or for accommodating current residents.

At the Mortgage Bankers Association’s annual convention and expo in Philadelphia this fall, Julia Gordon, who serves as the assistant secretary for housing and federal housing commissioner at the U.S. Department of Housing and Urban Development, spoke about new Federal Housing Administration policies that allow lenders to count income from accessory dwelling units when underwriting a mortgage.

“We’re going to allow both existing rental income for ADUs, and prospective rental income, to be included in the underwriting process to allow more borrowers to purchase properties with ADUs, to rehab existing houses to add ADUs, and to construct new homes with ADUs,” Gordon said.

So, in theory, a couple with children could purchase their family home with plans to add an ADU, using 50% of the estimated rental income their parents agree to pay when they move into that converted basement or garage, to help qualify for a mortgage.

Leaders at AARP, formerly the American Association of Retired Persons, have been actively lobbying around the country, asking state and local lawmakers to lift zoning regulations and other barriers to ADUs. They say that ADUs can provide housing for an older relative or a caregiver.

What do borrowers need to know about financing for an ADU?

There are many reasons people would like to buy a home with an accessory dwelling unit beyond bringing families together.

Fannie Mae recognizes that rent from accessory units and boarders can be a steady source of income for many homeowners, which is why their HomeReady program includes both types, with proper documentation, as a part of qualifying income.

“Our HomeReady® mortgage’s accessory unit income and boarder income flexibilities help to meet the diverse needs of today’s homebuyers by expanding access to creditworthy low-income borrowers,” a spokesperson told The Mortgage Note.

“Additionally, Fannie Mae has an ADU pilot program currently underway in which we are assessing whether the expansion of financing options for single-family homes with ADUs increases affordable supply of housing options.”

Neil Anders, host of the Emmy-nominated television program “Financing the American Dream” on CNBC and Bloomberg, said it’s critical to stay informed about any updates or announcements, as modifications to the requirements may impact the capacity of borrowers.

Like other government-backed companies and mortgage lenders, Fannie Mae regularly examines and amends its rules in response to a range of factors, such as the stability of the housing market, prevailing economic conditions, and concerns about risk management, he said.

Anders said that, overall, Fannie Mae is still a holdout for allowing borrowers to use rental income from an ADU.

“When determining mortgage amounts, based on the information provided, Fannie Mae remains cautious or conservative in considering rental revenue from an auxiliary dwelling unit,” Anders said. “Nonetheless, some goods are exempt from this rule, such as HomeReady and other cases involving borderline income. The background material is vague as to the exact justifications for Fannie Mae’s excessive prudence or unwillingness.”

Anders said Fannie Mae may be considering how adding rental income from ADUs would affect the stability of the housing market as a whole.

“It’s possible that Fannie Mae is always studying and researching to better grasp what it means to incorporate rental income from an ADU when making policy decisions,” Anders said. “Mortgage businesses often rely on data and research.”

Anders said that, in general, any mortgage business may be reluctant to accept certain types of income.

Reducing the risks connected to mortgage loans is one of the main duties of mortgage firms. “Mortgage firms may hesitate to rely solely on revenue streams that are subject to changes or that the state of the market impacts,” Anders said.

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