How ADU Income Saved the Day with a Conventional Mortgage

Good morning, and Happy Friday! I want to share a victory on a loan we just closed yesterday! I closed a loan that another lender turned down, proof that many in the industry are missing out on some loan guidelines. By leveraging Accessory Dwelling Unit (ADU) rental income, we turned a ‘no’ into a ‘yes’, securing a home for a client. Let’s break down how this works and why it’s a game-changer for you!

ADU Income: The Secret Weapon Most Lenders Overlook

ADUs - those clever in-law suites, garage apartments, or backyard cottages - are more than just bonus space. Many lenders don’t realize that conventional loan guidelines allow you to use this rental income to qualify for a mortgage, even when traditional income falls short. I proved this recently when a client was denied elsewhere. With a tenant locked in at $3,250/month, we calculated 75% of that ($2,437.50) as qualifying income, which brought the debt-to-income ratios into line and sealed the deal. You have to wonder how many people are pre-approved incorrectly?

The Best of Conventional Loan ADU Guidelines

We’ve blended the most consumer-friendly rules from Fannie Mae and Freddie Mac to create a winning strategy:

• Property Options: This works for 1-unit homes or 2- and 3-unit properties (up to four total units), giving you flexibility for single-family homes with an ADU or small multi-family deals - Freddie Mac’s leniency shines here.
• Income Power: You get 75% of the fair market rent (e.g., an appraiser’s Form 1007 or lease) as qualifying income. With a $3,250 tenant payment, $2,437.50 boosted my client’s profile, and the 30% cap on total income (per Freddie Mac) was a non-issue with reserves in play.
• Easy Documentation: A lease or market rent estimate does the trick. My client’s existing tenant agreement was gold, but even new ADUs qualify with projected rent if documented well. Freddie Mac’s option to skip the landlord experience with an education course (certificate required) added ease. “A 3rd grader can pass this test!”
• Zoning Edge: The ADU must follow local zoning or be a legal nonconforming use. Freddie Mac’s exceptions for unrestricted areas gave us the green light, especially in LA County’s ADU-friendly market.
• ADU Financing: If you have a client considering adding an ADU and they have equity, we offer a variety of loan options for ADUs as well.

A Real Win: The $950,000 Purchase That Almost Didn’t Happen

Here’s how it played out for my client. They earned $13,000/month but faced a $7200/month mortgage on a $950,000 home with a 10% down payment. Another lender said no due to the high debt-to-income ratio (55.40%). Enter ADU income:

• ADU Income: 75% of $3,250 = $2,437.50/month.
• Total Qualifying Income: $13,000 + $2,437.50 = $15,437.50/month.
• DTI: Dropped to 46.64%, which is under the 50% threshold they needed.
• Result: We closed the loan, and the tenant stays, covering 46% of the payment. That other lender? Still clueless!

Don’t Make This Mistake

I have seen in the past where agents try to make up their own comps for a rental unit. They converted a garage into an ADU, which they can rent for $3,000 per month. We can use $2,250.00 to help the buyer qualify. Then you find out the rental comps are $2000, and we can only use $1500.00, which could make a difference.

Pro Tips for Success

• Find the Hidden Gems: Target homes with ADUs or zoning for additions - California’s no-lot-size rule since 2017 is your ally.
• Educate and Shine: Create a client handout on ADU income perks - be the agent who knows what others don’t.
• Team Up: Work with appraisers and lenders like us who get ADU valuations right.
• This conventional loan perk turned a rejection into a celebration. At Augusta Financial, we’re here to make it happen. Let’s turn ADU potential into closed sales.

Please let me know if you have any questions or if a client needs my guidance. I’m just a call, text, or email away.

📞 Cell: 661-714-6258

📞 Direct Line: 661-291-2222

📞 Office: 661-260-2970 ext. 2222

📧 Email: Mike@AugustaFinancial.com

But wait, there's more…

Interest Rates

Interest rates had a five-day run to the good side, and that stopped on Tuesday! Now we are bleeding out a little each day, but rates are still slightly better than they were a week ago!

Loan Programs

• We do loans on Non-warrantable condos!
• We offer 12-day escrows for pre-approved buyers, including conventional FHA/Jumbo/Bridge loans.
• We provide loans in all 50 states, so call me with anything you need.
• Government loans (FHA/VA/USDA) are in the high 5’s and low 6’s.
• Conventional loans up to $806,500 are in the low to mid 6s.
• High-balance loans from $806,501 to $1,209,750 are also in the 6’s and 7’s.
• Jumbo loans above $1,209,750 are in the 6’s and 7’s.
• Bank statement loans are available with 10% down again, with larger down payments in the 6’s++.
• Profit and Loss Statement loans require 20% down - no bank statements needed, only a profit and loss statement!
• 0 down loans are available in the high 6s, with a minimum credit score of 620, up to $1,300,000.
• Private Money lenders offer Hard Money Loans with 35% down.
• No-Ratio Loans require a 30% down payment.
• DSCR (Debt Service Coverage Ratio) loans are available with as little as 15% down.
• Bridge Loans typically have an interest rate of 7.99% with limited fees, helping you get where you need to go!
• 3/2/1 Buydowns, 2/1 Buydowns, and 1/0 Buydowns are available at great starting rates!

Please note that interest rates are subject to change without notice, and the information above reflects LA County Loan Limits.

**Good News for Condos:**   

Canyon Village HOA – I am being told that they have fixed what was broken, and two loans are supposedly closing in there! This is not confirmed, but this is what we are being told!

**Bad News for Condos***

Apple Park – On Apple in Newhall! On the naughty list! Deferred maintenance – BALCONIES!

BIG NOTE –

We are starting to see condos with over 15% delinquency, indicating that people are struggling to pay all their bills. Stay tuned for more enlightening BS from me! LOL!

The full state of California’s naughty list has been added to: MikeMeena.com! See the link below:

https://mikemeena.com/non-warrantable-condos/

Let me know if you hear anything new about condos or townhouses.

I am available every day if you need anything.

📞 Cell: 661-714-6258

TEXT: 661-714-6258

📞 Office: 661-260-2970 ext. 2222

📞 Direct Line: 661-291-2222

📧 Email: Mike@AugustaFinancial.com

Have a great day and an even better tomorrow! Please call me when you have a client who needs to borrow!