There’s a long list of names floating around in the real estate and lending worlds when describing types of internal or external living quarters — ‘granny flats.’

But many local governments, building planners and inspectors prefer using accessory unit when describing a single family residence that has a “sidekick” or “backyard cottage” or even a “tiny house” on the same property because it’s a more generalized term.

According to Fannie Mae, “an accessory dwelling unit is typically an additional living area independent of the primary dwelling unit that includes a fully functioning kitchen and bathroom.” Assuming you are looking for financing on one of these properties, it’s mainly the responsibility of the appraiser to provide a description of the accessory unit and analyze any impact it might have on the value or marketability of the property.

Fannie Mae and Freddie Mac, even the FHA, will purchase these types of single family residence loans from your lender that include an accessory dwelling unit on them.

However, while it’s completely acceptable to have these types of structures on your property, provided they are approved of course, a problem might arise if you were to try and use rental income from the accessory unit to help you qualify for a home loan.

Fannie Mae says, “whether a property is a one-unit property with an accessory unit or a two-unit property will be based on the characteristics of the property, which may include, yet are not limited to, the existence of separate utilities, a unique postal address, and if the unit is rented.”

If it’s a two-unit property and valued on a multi-family appraisal form, then rental income from it will be accepted toward your loan qualification. Although if the appraiser values the home as a single-family residence with an accessory unit instead then you will likely be unable to use the rental income in your loan application.

In addition, regardless of whether you choose or need to leverage the rental income from the accessory unit, the property must still comply with zoning, use and even insurance codes to confirm the improvements made to it are acceptable to your lender. You should look for any special covenants or restrictions, as well, which may complicate things.

Nevertheless, there are a few exceptions. One of them is if you own the property already and can establish use of what’s called “boarder income” from the accessory unit. This means “boarders” must be related by blood, marriage or law to you, and the rental income from them needs to be currently reflected on your filed tax returns.

Another exception could be financing through a non-Fannie or Freddie or FHA source, such as a portfolio investor. If you go down this road, make sure your bags are packed with a great FICO score and plenty of reserves because their guidelines and loan programs can be a bit different without compensating factors.

Chris Salese can be reached at or (707) 363-4439. He is a licensed California mortgage banker (NMLS 254469/1850 CA BRE 01377933/01215943) and equal housing lender.


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