ADU
ADU properties are eligible across agency and non-QM programs, but rental income usage, appraisal requirements, and reserve obligations vary significantly by program, occupancy type, and landlord experience. The 30% income cap and full-appraisal mandate are the most
Part 1: ADU Definition & Physical Eligibility
Fannie Mae defines an ADU as "an additional living area independent of the primary dwelling that may have been added to, created within, or detached from a primary one-unit dwelling. The ADU must provide for living, sleeping, cooking, and bathroom facilities and be on the same parcel as the primary one-unit dwelling."
Structural requirements — all must be met :
- One ADU maximum per parcel; not permitted on 2-4 unit dwellings
- Must be subordinate in size to the primary dwelling
- Separate ingress/egress, kitchen, sleeping area, bathing area, and bathroom facilities required
- Kitchen must include cabinets, countertop, sink with running water, and a stove or stove hookup — hotplates, microwaves, and toaster ovens are not acceptable stove substitutes
- An independent second kitchen alone does NOT constitute an ADU
- Not eligible if accessible only through the primary dwelling or open to it
Fannie Mae further confirms: "A one-unit property with an accessory dwelling unit (ADU) is defined as a one-unit property and subject to all one-unit requirements, unless otherwise stated."
FHA: "An Accessory Dwelling Unit (ADU) refers to a single habitable living unit with means of separate ingress and egress that meets the Minimum Requirements for Living Unit. An ADU is a private space that is subordinate in size and can be added to, created within, or detached from a primary one-unit Single Family dwelling, which together constitute a single interest in real estate." A Single Family one-unit property with a single ADU remains a one-unit property.
VA: "An Accessory Dwelling Unit (ADU) is a living unit including kitchen, sleeping, and bathroom facilities added to or created within a single-family dwelling, or detached on the same site. The dwelling and the ADU together constitute a single real estate entity." The appraiser must notify the lender if a property has more than one ADU; ADU living area must NOT be included in the GLA of the primary dwelling.
Part 2: ADU Count Limits by Program
| Program | Max ADUs | Notes |
|---|---|---|
| Fannie Mae | 1 | Not permitted on 2-4 unit dwellings |
| Freddie Mac | 1 | Allowed on 1-, 2-, or 3-unit properties |
| FHA | 1 | SFR + 1 ADU = 1-unit; SFR with 2 units + 1 ADU = 3-unit property |
| Greenbox (Non-QM) | 2 | "Restricted to one-unit properties with a maximum of two (2) ADUs. Properties with three or more ADUs are ineligible." |
Lender overlays:
- JMAC Lending (Venice DSCR): "Two or more ADUs on a single lot are not permitted."
- JMAC Lending (ZUMA Prime): Same — "Two or more ADUs on a single lot are not permitted."
- AD Mortgage (Non-QM): Rental income from ADU on other real estate owned is not acceptable.
Part 3: Rental Income Eligibility by Occupancy Type
Fannie Mae — ADU income caps by scenario:
| Scenario | Has Primary Housing Payment? | Landlord Experience? | Income Restriction |
|---|---|---|---|
| 1-Unit Primary with ADU | Yes | Yes | Limited to 30% of total qualifying income |
| 1-Unit Primary with ADU | Yes | No | Limited to 30% of total qualifying income AND cannot exceed PITIA |
| 1-Unit Primary with ADU | No | N/A | No rental income permitted |
| 1-4 Unit Investment | Yes | Yes | No restriction |
| 1-4 Unit Investment | Yes | No | Offset PITIA only |
| 1-4 Unit Investment | No | N/A | No rental income permitted |
Freddie Mac (JMAC Conforming) — "Rental income generated from an ADU is to be considered when qualifying the Borrower for a Purchase or R&T refinance Mortgage only, provided that certain requirements are met, including but not limited to:
- The ADU must comply with zoning and land use requirements (legal, legal non-conforming or no zoning)
- An appraisal report must be obtained to support the ADU's marketability and include at least one comparable sale with an ADU that is rented. Full appraisal is required regardless of AUS findings — ACE appraisal waivers must NOT be accepted.
- The appraiser's rental analysis must include a minimum of three comparable rentals that support the market rent of the ADU, and at least one of the comparable rentals must be a property with an ADU.
- The ADU rental income used to qualify the Borrower does not exceed 30% of the total stable monthly income.
- At least one qualifying Borrower must participate in a landlord education program or have previous landlord experience for a minimum of one year."
FHA (JMAC Overlay) — ADU income eligible with the following conditions :
- Effective rental income from ADU must be <= 30% of total monthly qualifying income
- Form 1007 required — use the lesser of 75% market rent or 75% current lease
- 2 months PITIA reserves required for 1-unit with ADU from borrower's own funds
- Hotel/Transient Use Disclosure required
- Manual Underwriting: 1 month base + 2 months (ADU) + 3 months (compensating factor) = 6 months PITIA from borrower's own funds
- Duplex + ADU (3-unit): 1 month (manual) + 2 months (ADU) + 6 months (HUD compensating factor) = 9 months total reserves
Part 4: Rental Income Calculation — Long-Term vs. Short-Term
Owner-occupied and second home —
- JMAC Lending (Venice DSCR): "Owner-Occupied/2nd Home: Income from the accessory unit may not be used as qualifying income."
- JMAC Lending (ZUMA Prime): Same restriction applies for both purchase and refinance.
- New Wave Lending DSCR: "Owner Occupied/2nd Home: Income from ADU may not be used to qualify."
Investment property — long-term rental:
- Purchase: Lower of market rent per FNMA Form 1007/1025 or actual rent if lease is transferred (copy of lease required)
- Refinance: Lower of market rent per Form 1007/1025 or actual rent; lease agreement + 2 months proof of receipt required
Investment property — short-term rental:
- AD Mortgage (Non-QM): "The short-term rent from accessory unit (ADU) is not allowed."
JMAC Lending (Balboa Non-Conforming): "Qualifying rental income will be gross rents x 75% to account for vacancy losses and ongoing maintenance expenses." Also: "Rental income from an ADU is not allowed for primary residences and second homes."
Mega Capital (MCFI Simple Elite): Follows the same gross rents x 75% approach for ADU rental income.
Part 5: Appraisal Requirements
Fannie Mae: "When there is an ADU, the appraisal report must include a description of the ADU and analysis of any effect it has on the value or marketability of the subject property. The appraisal report must demonstrate that the improvements are acceptable for the market."
ADU living area must NOT be included with finished above-grade square footage of the primary dwelling — it must be reported and adjusted on a separate line in the grid.
Freddie Mac: Appraisal must include at least one comparable sale with an ADU when available; if unavailable, appraiser can justify use of a comparable without one.
Lender overlays:
- JMAC Lending (Venice DSCR): Appraisal must describe the ADU, analyze marketability effect, and demonstrate improvements are typical through "at least one comparable property with the same use and same number of ADUs." Form 1025 required when there are two ADUs.
- Greenbox: "The appraisal must confirm that the ADU configuration is typical for the subject market."
- Nations Direct (FHA): "Hotel and Transient Use Form is required when a 1-unit subject property includes an Accessory Dwelling Unit." Same requirement in Nations Direct AXIS FHA.
Part 6: Zoning — Legal, Legal Non-Conforming, and Illegal
Fannie Mae: "Some ADUs may predate the adoption of the local zoning ordinance and therefore be classified as legal nonconforming. An ADU should always be considered legal if it is allowed under the current zoning code." Where an ADU is not allowed under any zoning circumstance, the property may still be eligible under additional conditions.
Freddie Mac: 2- or 3-unit properties with an ADU that do not comply with zoning are NOT eligible for sale to Freddie Mac.
Lender overlays:
- JMAC Lending (Venice DSCR): If ADU is not allowed under zoning, the property can still be eligible if: (1) hazard insurance replacement cost includes the ADU, (2) illegal use conforms to the subject neighborhood and market, AND (3) the appraisal demonstrates improvements are typical through at least two comparable sales with the same non-compliant zoning use.
- Greenbox: "If an ADU is found to be non-compliant with local zoning (Illegal Use), the property remains eligible only if the following conditions are met" — specific conditions apply.
Part 7: Non-QM / DSCR ADU Treatment
Greenbox (Non-QM):
- Standard programs: "Income from an ADU may not be used to qualify."
- Under the rental income qualification section, Greenbox addresses conditions under which ADU rental income may be used if both required conditions are met, distinguishing long-term and short-term rental usage.
AD Mortgage (Non-QM — DSCR Refinance): "The actual rent for the accessory unit from FNMA Form 1007 may be used supported by a copy of the current lease agreement with two (2) months proof of current receipt." Short-term ADU rental income is explicitly not allowed.
Quick-Reference: ADU Rental Income Eligibility by Program
| Program | Owner-Occupied Primary | 2nd Home | Investment Property |
|---|---|---|---|
| Fannie Mae | Up to 30% of qualifying income (if has housing payment) | Not specified | Unrestricted or offset-only depending on landlord experience |
| Freddie Mac / JMAC Conforming | Up to 30% of total stable monthly income; landlord education/experience required | Per guide | Per guide |
| FHA (JMAC) | Up to 30% of qualifying income; Form 1007 required; reserves required | N/A | N/A |
| JMAC ZUMA / Venice / Balboa | Not allowed | Not allowed | Long-term: lower of 1007 or lease x 75%; short-term: per doc type |
| New Wave Lending DSCR | Not allowed | Not allowed | Lower of market or actual rent |
| AD Mortgage Non-QM | Per primary residence DTI rules | N/A | DSCR refis: Form 1007; short-term ADU income NOT allowed |
| Greenbox Non-QM | Generally not used to qualify | N/A | Long-term or short-term per conditions |
Key Underwriting Conditions to Flag:
- 30% income cap on ADU rental income is
consistent across Fannie Mae, Freddie Mac, and FHA — applies to primary residence transactions - Full appraisal mandatory on all ADU properties; ACE/PIW waivers are specifically prohibited under Freddie Mac conforming when ADU income is used
- Short-term ADU rental income is generally prohibited — explicitly not allowed under AD Mortgage DSCR
- FHA reserve stacking: 2 months PITIA for 1-unit + ADU; scales to 9 months for a duplex + ADU (3-unit classification)
- Hotel/Transient Use Form required on any FHA loan secured by a 1-unit property with an ADU (Nations Direct and JMAC FHA)
- Owner-occupied and second home transactions: ADU rental income not permitted as qualifying income across all conventional investment and non-QM programs reviewed
