There is no wording of which I am aware that states “if the property is a bona fide duplex, the borrower can live in either unit”.    HUD just has no wording that delineates which unit the borrower must occupy if the property is a 2 – 4 family residence located within an R-2 or R-3 zoning. 

However, HUD has some very specific guidelines if the second unit is determined to be an ADU.  If the appraiser and/or the lender determines that the second unit is an ADU, the borrower must reside in the larger or primary unit which seems to support what he said his lender has told him as well.  I don’t know what specific wording you can supply.  If his property is considered an ADU, the lender is correct in saying he is required to live in the larger, dominant structure to be eligible for the loan.  If he believes his property would qualify as a duplex or two unit property and that the second living unit does not qualify as an ADU, those are the grounds on which he will have to challenge the lender.  A word to the wise though, if it is a true duplex or 2 unit property, there are completely different requirements, zoning issues that must be met to be eligible for HUD insurance, comparable sales of other two unit properties that must be available (not others with ADU’s) and if it does not meet the 2-4 unit requirements, it may be harder to do the loan than the occupancy requirement is to fulfil.

Here is a set of guidelines with respect to ADU’s that are not straight from the HUD manual, but they are all taken from various HUD sources and are pretty complete.

Accessory Dwelling Unit (ADU)

An Accessory Dwelling Unit (ADU) refers to a habitable living unit added to, created within, or detached from a primary one-unit Single Family dwelling, which together constitute a single interest in real estate.  It is a separate additional living unit, including kitchen, sleeping and bathroom facilities. 

An ADU is usually subordinate in size, location and appearance to the primary dwelling unit, and may or may not have separately metered utilities or separate means of ingress or egress.  Attached units, contained within a single-family home, known as a “mother-in-law apartment” are the most common type of ADU.   An ADU MUST be subordinate in size to the primary unit, and the borrower(s) CANNOT reside within the ADU or the property is NOT eligible.

The appraiser must NOT include the living area of the ADU in the calculation of the Gross Living Area (GLA) of the primary dwelling.

As part of the highest and best use analysis, the Appraiser must make the determination to classify the property as a Single Family dwelling with an ADU, or a two-family dwelling.  The conclusion of the highest and best use analysis will then determine the classification of the property and the analysis and reporting required.

A tenant occupied ADU that is income producing must permissible per the local municipality having jurisdiction.  A letter on letterhead and signed by the authority must evidence it’s permissible for the ADU to be rented. 

If the ADU includes a kitchen with a range/oven, this second (2nd) kitchen must be in compliance with local zoning/building codes for a single family residence, to be considered a one (1) unit with an ADU for underwriting and appraisal purposes.

The appraiser must notify the lender of the deficiency in MPR or MPS if more than one ADU is located on the subject property.

Single Family with ADU

• Single family homes with an ADU are permitted as long as the following conditions are met:

• Square footage of the accessory unit is subordinate to the gross living area square footage
• ADU is legal and permitted by the town or removal will be required
• Must be common and customary to the area as evidence by comparable sales
• ADU is NOT rented.  If the ADU is rented then we MUST obtain evidence from the local municipality having jurisdiction that local code allows for the ADU to be rented.
• Borrower(s) do not reside in the ADU
• Existence of the accessory unit must not jeopardize any future hazard insurance claims
• There can only be one (1) ADU contained within, attached, or detached to the subject property

2-4 unit Properties with an Accessory Unit

• FHA does NOT permit 2-4 unit properties that contain an additional accessory unit
• FHA does not provide guidance on what must be removed in order to be eligible collateral.  That is to be determined by the local municipality that has jurisdiction over the subject property.  In some areas this may mean just the removal of the stove/range, while in other areas the entire kitchen (e.g., cabinets, countertops, sink, and appliances) will have to be removed.  A Compliance Inspection Report is required to verify removal.
• Even if the ADU is legally permitted per the municipality it is NOT eligible for FHA insured financing.