Distinction Between Rental Income on an ADU vs. Boarder Income

Question:

We have a loan for a primary single-family home with an ADU. I’m checking to see if I can use rental income instead of treating it under the boarder income requirements.

Answer:

Fannie Mae: This was recently updated to allow any Fannie Mae loan program (previously only HomeReady).

Allowance on Primary Residence: Fannie Mae explicitly permits rental income from an existing ADU on a one-unit principal residence. This is listed as a specific exception to the general rule that rental income from a principal residence cannot be used.
Distinction from Boarder Income: Fannie Mae separates the guidelines for ADU rental income from “Boarder Income.”
Boarder Income: Generally ineligible unless the borrower has disabilities and a live-in assistant, or under HomeReady guidelines. It requires documentation of shared residency (e.g., driver’s license) and a 12-month history of payments.
ADU Income: Does not require a history of shared residency. Instead, it requires that the ADU be an independent living area with separate features (kitchen, bath, ingress/egress).

Requirements:

The transaction must be a purchase or a limited cash-out refinance.
The income is limited to 30% of the total qualifying income.
You may use a fully executed lease agreement to document the income.

Freddie Mac – see this fact sheet: https://sf.freddiemac.com/docs/pdf/fact-sheet/adu-fact-sheet.pdf.

Allowance on Primary Residence: Freddie Mac allows rental income generated from an ADU on a subject 1-unit Primary Residence.
Distinction from Boarder Income: Freddie Mac distinguishes between “Rental income from an ADU” and “Rental income from a live-in aide” (their equivalent to boarder income).
Live-in Aide: Requires evidence that the borrower has received stable rental income for the most recent 12 months.
ADU Income: Does not require a history of the tenant living with the borrower. For a purchase transaction, you can use the existing lease (if available) and an ADU rental analysis from the appraisal.

Requirements:

The mortgage must be a purchase or “no cash-out” refinance.
The amount of net rental income used for qualifying must not exceed 30% of the total stable monthly income.
For purchase transactions, if a lease is not available, you may use the gross monthly market rent from the ADU rental analysis (using 75% for calculation).
Mortgage Guideline Supporting Resources – Rental Income – All Agency Comparison Chart found under “Guideline References” in “Charts & Checklists”.

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