New Federal Housing Administration policies expand financing for Accessory Dwelling Units, supporting the City of Asheville’s housing policy

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The City of Asheville supports Accessory Dwelling Units (ADUs) as a way to spur the development of more affordable housing options and promote diversity in the types of housing choices available for residents. ADUs are also known as backyard cottages, mother-in-law suites, basement apartments, ancillary units, carriage houses, and garage apartments. These smaller dwelling units provide all the necessary elements of any home, including a kitchen, bathroom, and living/bedroom, but at a smaller scale that is accessory to the primary home. 


ADUs are permitted in all residential zoning districts, though are currently only allowed on lots with one single-family home. Standards and regulations for ADUs in Asheville can be viewed on the City’s project page for ADUs. Asheville updated regulations in 2015 to provide more flexibility for ADUs, but many residents have had problems financing ADUs that historically have been outside of traditional bank financing. 


Today the City announces that the Federal Housing Administration (FHA) just released a new policy that now expands access to mortgage financing for homes that have or will include ADUs. These rule changes expand the incentives for ADUs by making them now easier to finance. 


According to the FHA, the new policies will:

  • Allow 75% of the estimated ADU rental income for some borrowers to qualify for an FHA-insured mortgage on a property with an existing ADU. This additional income flexibility will help to increase access to homes with ADUs for homebuyers with limited incomes, allowing them to benefit from the wealth-building opportunity of a property with an ADU.
  • Use 50% of the estimated rental income, for some borrowers, from a new ADU the borrower plans to attach to an existing structure, such as in a garage or basement conversion, to qualify for a mortgage under FHA’s Standard 203(k) Rehabilitation Mortgage Insurance Program. This will enable more homeowners with limited incomes to build ADUs, helping them sustain homeownership and expanding the production of ADUs as rental housing.
  • Include ADU-specific appraisal requirements for appraisers to clearly identify, analyze, and report on ADU characteristics and the estimated rent the ADU can be expected to generate. The guidance provided in the Mortgagee Letter will assist appraisers to more accurately determine the market value of a property with an ADU and also will help advance the maturation of ADU valuation, thereby increasing access to ADU financing as more cities and states remove zoning barriers.
  • Add ADUs to the types of improvements that can be financed under FHA’s mortgages for new construction. This allows new homes to be built with ADUs from the ground up, an important source of ADU production in addition to rehabilitating existing structures.

To read about FHA’s new regulations, you can view their press release

To learn more about ADUs, visit the City’s ADU website.