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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 30 March 2025 F E A T U R E S T O R Y THE RISE OF ADUs: WHAT LENDERS AND BORROWERS NEED TO KNOW As the housing shortage continues, Accessory Dwelling Units are rising in popularity, with many cities and states altering their regulations to make it more feasible for property owners to add an ADU. B y R . A L A N PA I R , S R A I f you are a fan of the 1970s sitcom Happy Days, then you are already familiar with Accessory Dwelling Units (ADUs). The independent living space that Arthur Fonzarelli, better known as "Fonzie," lived in above the Cunningham's garage, with its own en- trance and bathroom, qualifies as an ADU. If Full House is more your speed, the upstairs attic where Uncle Jesse and Aunt Becky lived and started their own family can also be considered an ADU. ADUs have been in existence for centuries, often meeting different socie- tal or generational needs. While ADUs have different parameters based on the lender, they are typically a secondary living space that is independent of the primary residence but located on the same parcel. They must have their own kitchen, bathroom, and sleeping space, along with a separate entrance, while also being smaller and providing less value than the primary residence. Today, ADUs are once again rising in popularity, as the housing shortage continues, and homeownership comes with a hefty price tag. With this, many cities and states are altering their regu- lations, and in some cases relaxing them to make it more feasible for property owners to add an ADU. The National Apartment Associ- ation was recently following 12 bills across eight states that mentioned ADUs. They also reported that, as of 2023, at least eight states have poli- cies that preempt local bans of ADU construction. A new policy announced through the Federal Housing Au- thority (FHA) in late 2023 also aims to make ADUs more accessible, allowing lenders to count income from these independent units when underwriting a mortgage. A 2020 Freddie Mac study indi- cated there are 1.4 million properties with ADUs across the United States. At that time, the study showed that ADU construction was rising by 8.6% per year over the last decade. Over the last few years, that number has skyrocketed. In California alone, John Burns Research and Consulting pulled data from the California Department of Housing and Community Development that shows ADU construction went from 3,000 units per year in 2018, to 23,000 a year in 2023. Whether serving as an independent living space for family members or bringing in residual income through rent for the property owners, ADUs of- fer a wide range of advantages. But there is a lot that lenders need to be aware of, from complex zoning requirements that vary not only by state, but often down to the municipality, to ensuring they are working with the right appraiser who understands the ins and outs of the space. The rules for ADUs are ever-changing. Key Benefits to ADUs A DUs have become a popular way for families—whether it's a child in their 20s or a grandparent—to live near one another while also having their own independent space. For borrowers, this is a big perk, as costs to build an ADU can be lower than a full-size home, as R . A L A N P A I R , S R A , is Chief Appraiser and SVP of Valuation for ServiceLink, respon- sible for managing the Risk Assessment and Standards Department, the Appraiser Independence Department, as well as, working closely with ServiceLink senior management and legal compliance in the development of quality and performance initiatives.