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There are 2 structures on my lot. I rent the larger one to others & live in the smaller one. I have been told that I will be required to live in the larger one for a reverse mortgage. Could that possibly be a HUD requirement? I would like to get a copy of HUD's written regulations or law or whatever such a document might call to give to my lender. Even a citation to where such a law appears would be better than nothing. Since the government is partially shut down, I cannot call HUD for help. Could you please provide a citation or a copy of the actual law? It will make a great difference for me. Thank you.
By M. Bursak on 01.24.2019There is no specific HUD guideline stating that if a property is a bona fide duplex, the borrower can live in either unit. HUD simply does not specify which unit must be occupied in a 2–4 unit residence located in R-2 or R-3 zoning.
However, if the second unit is determined to be an Accessory Dwelling Unit (ADU), HUD has clear occupancy rules. If the appraiser or lender classifies the second unit as an ADU, the borrower must reside in the larger or primary unit. This aligns with what his lender has told him.
How to Challenge the Lender’s Classification
- If the lender classifies the second unit as an ADU, the borrower must live in the primary unit to qualify.
- If the borrower believes the property qualifies as a true duplex and the second unit is not an ADU, they must provide evidence to challenge the lender’s determination.
- A true duplex or two-unit property has different FHA requirements, including:
- Zoning compliance
- Comparable sales of other two-unit properties (not homes with ADUs)
If the property does not meet the 2–4 unit criteria, obtaining HUD insurance may be more difficult than simply meeting the occupancy requirement.
HUD Guidelines for ADUs
What is an ADU?
An Accessory Dwelling Unit (ADU) is a habitable living unit that is:
- Added to, created within, or detached from a primary single-family home.
- Considered part of a single real estate interest.
- Includes a kitchen, sleeping area, and bathroom.
Most ADUs are smaller than the primary unit and may or may not have separate utilities or private entrances. Common ADUs include mother-in-law apartments or converted garages.
Key ADU Restrictions for FHA Reverse Mortgages
- The borrower cannot live in the ADU—they must reside in the primary unit.
- The ADU’s square footage must be subordinate to the primary home.
- The appraiser must not include the ADU's living area in the total Gross Living Area (GLA).
- The property must be classified as either a single-family home with an ADU or a two-family dwelling, based on highest and best use analysis.
- A rented ADU must be legally permitted. The borrower must obtain written confirmation from the local municipality that rental use is allowed.
- If the ADU includes a kitchen, it must meet local zoning and building codes for a single-family home.
FHA Rules for 2–4 Unit Properties with an ADU
- FHA does not permit 2–4 unit properties that also contain an ADU.
- If the property has an ADU in addition to multiple units, it is not eligible for FHA-insured financing.
- Modifications may be required to make the property eligible, which could involve:
- Removing the stove/range in some areas.
- Removing the entire kitchen (cabinets, countertops, sink, and appliances) in others.
- A Compliance Inspection Report is required to verify removal.
Even if the local municipality permits the ADU, FHA will not insure a 2–4 unit property that also includes an additional accessory unit.
Bottom Line
If the property is considered a single-family home with an ADU, the borrower must live in the primary unit. If it qualifies as a true duplex, different FHA requirements apply. Before proceeding, it’s crucial to clarify whether the lender is categorizing the second unit as an ADU or a legal two-unit property, as this will determine eligibility.
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