Freddie Mac Eases ADU Financing for Affordable Living

Freddie Mac’s CHOICERenovation loan expands its benefits for current and future homeowners. With this updated loan, the agency now considers the added value an Accessory Dwelling Unit will bring as a rental unit which gives borrowers access to more funds to invest in their current or future property.

More Opportunities with Freddie Mac's CHOICERenovation Loan!

By: Eliana Lerma

With the cost of living at an all time high, homeowners have been in need of creative solutions to help alleviate some of these market pressures. On June 1st of this year, Freddie Mac announced that Accessory Dwelling Unit rental income on a single-family residence can be used to qualify for a mortgage.

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For years, Freddie Mac has been very specific about what type of property they will allow financing for. Their updated policy announced that ADUs can now be built on 2- and 3-unit properties! Borrowers who are building or renovating or who have previously built or renovated an ADU have the option to use the Choice Renovation loan.

Because of the advantages of renting ADUs, the agency has expanded the use of rental income for qualifying buyers on 1-unit primary residences as well. Income from a rented ADU may be used to get up to 30% of the total income used to qualify.

How does the update help new home buyers?


The change that recently took place specifically says that a single family residence with an ADU can now use the rent generated to help qualify. If you were trying to buy a single-family home with an ADU prior to this update, and maybe the price point was out of your reach, your borrowing ability may be limited for that home. As a result of this update, home buyers could add an ADU as a rental unit that can help offset the payment. This option directly elevates borrowing power and gives home buyers more choices to look for houses with an ADU or ADU building potential as it relates to their ability to borrow and invest those funds.


Imagine This!

Imagine you are wanting to buy a home listed at $500,000 USD. Your borrowing limit is $400,000, but this home has a legally permitted structure in the form of an Accessory Dwelling Unit in the backyard! Let’s say that the rental potential of that ADU is $2,000 a month and you rent this unit for 5 years. With this rental calculation, you could add $120,000 on top of your initial $400,000 borrowing amount, expanding your potential to $520,000 or more depending on the appraisal of your property’s future value by renting out the unused space!


This gives new home buyers a competitive advantage because they can compete with the other offers. There are no income restrictions when applying for this loan. Being able to consider the ADU rent may mean the difference between a loan denial and qualifying California's current inflated market.

*Variables are determined by each appraiser and are subject to change based off the average rent calculated in your area, but it is an amazing update that the appraised/estimated value of one or more rental units is considered with this now loan, allowing you to borrow more to invest in your current and future property.

Keep in mind these points:

ADU rents cannot exceed 30% of your total qualifying income.

ADUs must include a kitchen and a bedroom. Check out these modern and customizable ADU designs that meet Freddie Mac’s criteria! 

It has to be a legal secondary unit. In California, it is very clear if there is a permit for an ADU or not. 

What about current homeowners?

The CHOICERenovation loan also helps current homeowners who are interested in investing in their home with an ADU to add more living space, gain equity, and generate rental income to offset the cost of their mortgage. Homeowners interested in an ADU can refinance their existing first mortgage and pay off short-term debt used for ADU construction. 


Let’s say you have a single-family residence with a main dwelling unit and enough space to build an ADU. Your contractor gives you a quote of $250,000 to build the entire project.

Your borrowing limit before CHOICERenovation is $200,000, but after this update, the loan amount includes the potential rental income of the ADU to increase this amount. The average rental price of an ADU is $1,000. This means that if you rent it for 5 years, you will get $60,000 in addition to your previous borrowing limit.

*Variables are determined by each appraiser and are subject to change based off the average rent calculated in your area, but it is an amazing update that the appraised/estimated value of one or more rental units is considered with this now loan, allowing you to borrow more to invest in your current and future property.

What properties are ineligible?

 

Mortgages secured by the following property types are not eligible for purchase by Freddie Mac:

A two or three unit property with an ADU that does not comply with zoning and land use requirements (illegal zoning)
A one, two, or three unit property with two or more ADUs
A four unit property with an ADU

Whether you are a new home buyer browsing properties with an existing ADU or a property owner wanting to build an ADU, you now have increased your borrowing power to generate rental income that exceeds your monthly mortgage payments. This update is effective immediately, and it’s helped new home buyers as well as those wanting to invest in their existing home to add more living space, gain equity, and generate rental income to offset the cost of their mortgage. The majority of funding agencies today are backed by Freddie Mac, so you can use any lender of your choice. The lenders require project plans, so we recommend you establish those before contacting a lender. We have worked with many homeowners to give them the renovation plans and the financial analysis they need for a quick approval.
Book a Free Consultation to see how you could benefit!
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