Can You Use FHA on a Property With 2 ADUs?

It sounds perfect: Buy a home with two accessory dwelling units (ADUs) using FHA with just 3.5% down and rent out the ADUs.

If only it were that simple.

Unfortunately, FHA does not finance homes with two ADUs on the property.

The HUD 4000.1 states, "The Appraiser must notify the Mortgagee of the deficiency in MPR or MPS if more than one ADU is located on the subject Property."

"MPR" refers to HUD's minimum property requirements. Any home receiving FHA financing must meet MPRs.

So, if you have found a great opportunity but it has two ADUs, you probably know why it's such a good deal.

Can the Appraiser Call the Property a Duplex With an ADU (Or a Triplex)?

One possible solution, though, is for at least one of the ADUs to be similar in size and construction to the main home.

Admittedly, this is a long shot, but worth exploring.

You might be okay if the appraiser can believably call the property a duplex. FHA can finance a duplex with an ADU.

This might happen if the appraiser thinks one of the ADUs is similar enough to the main home to call it a duplex. It helps if the property is legally a duplex, has all appropriate permits, looks like the main home, and duplexes are common in the market.

According to FHA, “the Appraiser must make the determination to classify the Property as a Single Family dwelling with an ADU, or a two-family dwelling. The conclusion of the highest and best use analysis will then determine the classification of the property.”

Yes, this means that the appraiser has the power to call it a single-family home with two ADUs, a duplex with an ADU, or even a triplex.

FHA defines an ADU as “subordinate in size, location and appearance to the primary Dwelling Unit and may or may not have separately metered utilities or separate means of ingress or egress.”

So, if both ADUs are “subordinate” to the main home, the deal is probably not going to work.

Asking an Appraiser

Modern lending laws say that the borrower may not have contact with the appraiser, as this could result in value manipulations.

You will likely not be able to talk to the appraiser who prepares the report on the home.

However, you can contact any appraiser in your area to get their take on the exact property.

All appraisers must follow the same guidelines and are trained similarly. If one appraiser is reasonably confident that a property is a duplex with an ADU, chances are another appraiser would too.

That being said, there’s always a risk that one appraiser will interpret a property differently than another, so proceed with caution.

A Possible Exception: A Duplex With Two ADUs

Another obscure rule in the FHA handbook states, “For any Property with two or more units, a separate additional Dwelling Unit must be considered an additional unit.”

In other words, a duplex with an ADU must be considered a triplex, at least for the purposes of an FHA loan.

Taking this one step further, a duplex with two ADUs should be considered a fourplex. After all, it is a “property with two or more units” with additional and separate dwelling units.

If you encounter this situation, inquire with your lender and a local appraiser. Don’t make an offer on the property without being fairly certain that the lender can consider it a fourplex.

If you do, build a rock-solid financing contingency to get out of the deal if you can’t secure financing.

What About Conventional?

Fannie Mae conventional loans are even more restrictive than FHA. It does not allow two ADUs on the property or a 2-4 unit property with an ADU.

The home needs to be a single-family house with an ADU to qualify.

With conventional, you can use ADU rental income to qualify only for Fannie Mae HomeReady loans or Freddie Mac loans. As of October 2023, FHA allows you to use ADU rental income on a single-family home.

An ADU Property Is a Great Opportunity

Finding an affordable property with an ADU is a great way to become a homeowner and dip your toes into real estate investing. Even if it has two ADUs, it’s worth exhausting all possibilities for financing.

Homes with an ADU are in high demand, so if you find a good one, it might be the opportunity of a lifetime.