An ADU or Accessory Dwelling Unit is common in many parts of the country. These are often seen as a Guest house in California and other states, adjacent to a single family home for example. In an older city like Chicago, they may be referred to as a Coach house, usually behind an older property, in the backyard, on the alley or at the end of a driveway.

I’m writing this post today with news of a change from Freddie Mac on how to use a Conventional renovation mortgage to finance the new construction or renovation of an ADU when there is more than just a single family house on a lot.

Freddie Mac has announced with Choice Renovation, it will allow an ADU with not only just a single family house on a lot, but also with a main property that currently has two or three apartments. This is a significant change Freddie Mac has made that mirrors where the market has gone in many cities that have a shortage of housing and wish to create more units.

In Chicago, where I live, for example, in the last couple years the building code has provisionally changed to allow the construction of an ADU, or Coach house apartment above a garage with 700 square feet of living space under certain conditions and in selected locations around the city. This means someone can demolish an existing garage and replace it with another that is more structurally sound which can support a 700 square foot apartment on top, provided the height of the structure is no more than 22 feet. Or if there is an existing attic or basement space in the main building, one ADU can be added there under certain conditions as well. But only one ADU per parcel can be added.

The challenge has been how to finance the cost of construction, renovation, or addition of an ADU. Neither an FHA nor a VA guaranteed mortgage will allow for a new build of an ADU structure with renovation loans each offers – 203k and VA Renovation. The only option was Fannie Mae or Freddie Mac on a conventional HomeStyle or Choice Renovation loan. But the regulations of both Fannie Mae and Freddie Mac were that an ADU can only be added to a single family one unit house, not a 2 or 3 unit small apartment building.

With this recent announcement by Freddie Mac that has changed. Now a Choice Renovation loan can be used to add an ADU to an existing one, two or three unit property. That means that a duplex or triplex is eligible for ADU construction or renovation financing using the Choice Renovation mortgage offered by Freddie Mac.

In an older city like Chicago that is welcome news given the amount of two and three unit small apartment buildings that now will be eligible for financing to add an ADU behind the property in place of an existing garage or in a basement or attic space. In Chicago we refer to these as two flats or three flats. There are large numbers of these structures built across the city and now adding another living unit can help alleviate a housing shortage using Choice Renovation.

This can be done at purchase time with one mortgage and one closing to include all needed funds for the ADU. Or as a refinance of an existing mortgage, to first pay off the current mortgage and replace it with a Choice Renovation mortgage that includes funds to build out the ADU.

To be clear the Coach house or Guest house type ADU can be a totally new structure built from the ground up with Choice Renovation. It does not have to be a rehab of an existing structure. The structure can be a new build with an apartment above per local building codes with Choice Renovation. With this regulation change the main building can already have two or three apartments in it.

Here are Freddie Mac’s required characteristics for an ADU-

  • An ADU is typically an additional living area independent of the primary dwelling that may have been added to, created within, or detached from a primary dwelling. The ADU must provide for living, sleeping, cooking, and bathroom facilities and be on the same parcel as the primary one unit dwelling (now updated to a two or three unit dwelling).
  • Examples of ADUs include (but are not limited to):
    • a living area over a garage
    • a living area in a basement
    • a small addition to the primary dwelling
    • a manufactured home (legally classified as real property)
  • The ADU must:
    • be subordinate in size/living area to the primary dwelling
    • have the following separate features from the primary dwelling:
      • means of ingress/egress (include a separate entrance)
      • kitchen
      • contributes less to the value of the property than the primary dwelling units
      • include a bathroom
  • The ADU may, but is not required to, include access to the primary dwelling. However, it is not considered an ADU if it can only be accessed through the primary dwelling, or the area is open to the primary dwelling with no expectation of privacy.

Here are Freddie Mac’s property types/eligible properties for an ADU-

  • 1, 2, and 3 unit primary dwelling with ONE ADU on same parcel
  • ADUs are not permitted with a 4 unit dwelling
  • A 1, 2 or 3 unit property with an ADU must comply with the zoning and land use requirements for the jurisdiction in which its located. Acceptable zoning classifications include legal, legal non-conforming or locations with no zoning
  • ADUs that are manufactured homes are allowed under certain conditions
  • A manufactured home may have a “stick built” ADU only. If the primary dwelling is a manufactured home, it cannot have a manufactured home ADU.

Below are Choice Renovation ADU guidelines in summary format-

Freddie Mac will allow 1-, 2- and 3-unit properties with ONE ADU

  • ADU and primary dwelling must be on the same parcel
  • A 1-, 2- or 3-unit property with an ADU must comply with the zoning and land use requirements for the jurisdiction in which it’s located. Acceptable zoning classifications include legal, legal non-conforming or locations with no zoning.
    • Exception: An ADU on a 1-unit property may have illegal zoning under certain conditions.
  • ADUs that are manufactured homes are allowed under certain conditions.

CHOICE Renovation can be used to add an ADU, including a manufactured home ADU and now can be used as a no-cash out refinance to pay off short term financing that financed ADU renovations, including the addition or renovation of an ADU that is completed prior to the note date.

I hope this post has been helpful to better understand how a Choice Renovation mortgage can now be used to create an ADU with a one, two or three unit existing property. Please contact me with questions any time.

Perry Farella 773-248-8422 perry.farella@primelending.com Perryfarella.com

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