Fannie Mae just supersized a landlord’s potential income by expanding financing for accessory dwelling units (ADUs).
In doing so, the government-sponsored mortgage underwriter has made it easier for everyday investors to add rentable units, boost cash flow, and tap into the land around properties they already own, thereby driving appreciation.
By expanding the ways ADUs can be financed and loosening rehab lending guidelines through its HomeStyle, HomeReady, and Construction-to-Permanent renovation programs, Fannie Mae has opened the door for homeowners to become landlords and for small investors to turbo-boost revenue from their existing single-family and small multifamily buildings.
What’s Changed?
In its Selling Guide Announcement SEL-2025-10, Fannie Mae announced an expansion of ADU eligibility to increase housing supply and make it easier to update housing stock, stating the update was intended to “meet the growing demand for flexible and affordable housing solutions.”
Specifically, Fannie Mae will purchase loans for two-to-three unit homes that include an ADU. In total, each property is now allowed to contain four units, so a single-family unit can contain three additional ADUs, as long as it adheres to zoning laws.
Additionally, ADUs are permitted on single-wide manufactured homes, removing a previous restriction requiring multisection units. This addresses rural and lower-density areas where manufactured homes are more prevalent.
Possible configurations for investors looking to add ADUs to their portfolios are:
- A duplex + one ADU
- A duplex + two ADUs
- A triplex + one ADU
- A single-family + three ADUs
Energy and Resiliency Improvements Can Be Financed Too
With the rise in extreme weather-related incidents, financing energy and climate-related resiliency improvements, such as storm and fire-resistant measures, could be a big deal for investors in vulnerable states looking to safeguard their ADUs without incurring the cost of a full energy report.
When used as rentals, these improvements could be a big draw for potential guests and tenants. The addition of ARM loans means that owners can update and adapt existing homes without being saddled with pricier 30-year mortgages.
Appraisals and Income
In the near future, appraisals could present a problem, as these configurations are so new to the market that appraisers might have a tough time pulling comps to meet Fannie Mae guidelines for HELOC financing or sales.
With regard to income, a portion of ADU rent can also be used to qualify, as the rent from a small multifamily helps an owner-occupant looking to house hack qualify for a loan. With one unit as the primary residence—when purchasing or doing a cash-out refi—only one ADU’s rent can be used (even if more exist), and its revenue is capped at 30% of your total qualifying income.
So, for argument’s sake, say you were using your ADU as a short-term rental, and Leonardo DiCaprio decided to stay there, paying you $10,000 a night.
First, great for you! Second, you couldn’t use all his rental income for your refi. However, the money it contributes to your total qualifying income could raise your purchasing power. This is not necessarily a bad thing, as it protects against over-leveraging and the temptation to inflate rental income.
Here’s an example, according to Innovative Mortgage Brokers:
- Your base qualifying income is $6,000 a month.
- Market rent for the ADU is $1,200; lenders usually count 75% ($900) for qualifying purposes.
- While $900 is 30% of $3,000, we’re adding it to $6,000. The cap says ADU income used can’t exceed 30% of your total. With $900, your total becomes $6,900, and the $900 used is within that 30% cap.
Throwing an FHA Loan Into the Mix
FHA lending guidelines are baked into the new Fannie Mae ADU rules, allowing for lower down payments and credit scores than with conventional loans. “We’re going to allow both existing rental income for ADUs and prospective rental income to be included in the underwriting process,” said Julia Gordon, HUD’s Assistant Secretary for housing and federal housing commissioner, noting that the change is designed to help borrowers finance properties with ADUs or add them during renovations, according to The Mortgage Reports.
Renovation Lending Becomes More Investor-Friendly
The ADU update includes major improvements to HomeStyle Renovation loans. Here are the main changes:
- Up to 50% of renovation costs can be disbursed at closing (no outside borrowing or leaning on a contractor to front the starting costs)
- Larger renovation budgets are allowed for manufactured housing.
Putting New ADU Lending Guidelines to Use in the Real World: An Investor Playbook
“Hidden density” is the new value-add: Look for units with convertible space. This can include:
- Oversized lots
- Alley access
- Detached garages
- Basements or underused structures
- Existing duplexes or triplexes with extra yard space
Zoning is the grim reaper: The new Fannie Mae ADU rules are good, but they’re not good enough to overcome prohibitive zoning. Before imagining your overflowing bank account, double-check that your dream property complies with applicable zoning guidelines. Confirm:
- How many ADUs are allowed?
- What are the size and height requirements?
- What are the parking requirements?
- Are detached ADUs permitted?
The latter taps into the YIMBY versus NIMBY movement, where wealthier single-family neighborhoods oppose ADUs for the same reasons they do not allow multifamily dwellings: fears of parking issues, turning communities into rental-heavy, transient areas, and lowering the quality of schools.
“If you have the 16-foot poison pill in your regs, it’s not good enough,” says Kol Peterson, a nationally recognized ADU expert and founder of AccessoryDwellings.org, in a recent podcast. “It needs to be much better … that doesn’t mean that everywhere in the country has good codes except for Portland, Seattle, and a few jurisdictions in California.”
The Cost of Building an ADU
As welcome as the new ADU-friendly guidelines from Fannie Mae are, they don’t translate to “free new rental units for everyone!” ADUs cost money. Just how much, however, varies greatly. Converting a glorified garden shed, attic, or basement is likely to cost way less than replicating an Ibiza-style lounge in your back garden.
According to home renovation site Angi, the average ADU costs $180,000, but an ADU generally costs between $60,000 to $285,000, depending on size, scope, and location. It’s possible to scrape by with a sub-$80K ADU in less-expensive markets—bearing in mind that ADU requirements mandate a kitchen, bathroom, and a separate entrance. When converting a part of your existing home, the exterior costs of weatherproofing a roof, walls, and sometimes even installing insulation can be taken out of the equation.
Final Thoughts
Adding doors without buying new properties almost seems too good to be true for an investor, but it’s a practical way to bring in additional income for homeowners and increase an investor’s portfolio, while helping with the housing crisis. With financing on board, this could be a game changer in a high-interest rate, low-inventory environment.
