Consider buying a home with an “accessory apartment” to help pay your mortgage

Commonly known as “in-law” or “mother-daughter” units, accessory apartments are small living spaces within a single-family home that are rented out. In the past, rental income on apartments within a single-family home could not be counted as qualifying income for a mortgage.

The newest programs from Fannie Mae and Freddie Mac, as well as FHA and VA, allow rental income from boarders and accessory apartments to help borrowers qualify for a mortgage. General rules require accessory apartments to have a separate entrance and unique address, a fully-functioning kitchen, and bathroom. Apartments located over a garage or in a basement are acceptable as long as construction complies with local zoning laws.  Mortgage lenders will generally subtract 25% from the gross monthly rent to cover utilities, insurance and maintenance.  Here’s a scenario:

The home buyers want to share their home with family members who will contribute financially and help with the children. The mortgage payment will be $2,000 per month, and the appraiser confirms that the market rent on the accessory unit is worth $800 per month. The lender will subtract $200 for maintenance, and add $600 to the borrowers’ qualifying income, increasing it from $4,000 monthly to $4,600.  Due to the rent, their debt-to-income ratio drops from 50% to 43%, allowing them to qualify for the mortgage.

Accessory apartments and boarder income are explained in the “New Additions to Qualifying Income” chapter in Housing Finance 2020.

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