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Freddie Mac Eases Granny-Flat Mortgage Financing

Granny flats – small apartments added to a home or built in a yard – will be easier to finance since lenders can now consider rental income for mortgage approvals.

WASHINGTON – It just got a lot easier to qualify for a mortgage covering the construction costs of an accessory dwelling unit (ADU), commonly called casitas, in-law units and granny flats.

On June 1, Freddie Mac announced ADU rental income on a single-unit primary residence can be used to qualify for a mortgage. Previously, rental income could be used only by disabled borrowers to qualify for loans to buy, renovate or refinance ADUs for their caregivers.

Additionally, Freddie expanded its mortgage menu to provide purchase or refinance loans for one ADU on two- and three-unit properties. Previously, it was single-unit ADU financing only.

The big opportunity is a combination loan covering the purchase of a home and the construction of an ADU.

Freddie’s Choice Renovation Mortgage allows “first-time” buyers who haven’t owned a home in the past three years to put as little as 3% down and build an ADU. Repeat buyers who have owned a property within three years need to put 5% down.

The down payment is based upon the completed value of the property or the sales price plus the cost of the project, whichever is less.

For example, say the purchase price is $475,000 and ADU construction costs $150,000. That’s a total cost of $625,000. If the appraised value of the home and the completed ADU is projected to be $700,000, the down payment would be based on the lower value of $625,000 – or $18,750 for a first-time buyer or $31,250 for a repeat buyer.

There are no income restrictions. And being able to consider the ADU rents may mean the difference between a loan denial and qualifying in high-cost California. ADU rents cannot exceed 30% of your total qualifying income.

Choice Renovation also can be used to refinance your existing first mortgage and pay off short-term debt used for ADU construction.

Let’s say you added a 725-square-foot ADU at $200 per square foot, for a total cost of $145,000. Assuming you get a 30-year mortgage at 5%, the payment would be about $925 per month, including taxes and insurance. If the rent totals $2,400 per month, you just made yourself a handsome $1,475 per month. Can you say smart investment?

Seventy thousand U.S. homes sold in 2019 had an ADU, up from 8,000 in 2000, according to a 2020 Freddie Mac report.

“The growth of accessory dwelling units (ADUs) in the United States has been dramatic, particularly in high-cost areas seeing significant population growth,” the report said. ADU demand is highest in California, Florida, Texas and Georgia.

The devil is in the details. For example, Freddie financing requires ADUs to have a separate entrance, a kitchen and a bathroom. The borrower can occupy the ADU and rent out the home. Attached or detached ADUs are acceptable. Even a garage conversion works.

Besides stick-built ADUs, there are manufactured ADUs that are trucked in and hoisted into place with a crane. Even some homebuilders are adding ADUs as an option, Dunmoyer said.

When picking a contractor, be prudent, cautious and careful. Take the time to tour its completed projects. Thoroughly interview references and check licensing. Finding a competent, dependable and reasonably priced professional is key.

© Copyright 2022, Daily Breeze, all rights reserved. Jeff Lazerson is a California mortgage broker.