April 26, 2017
A reader asked us a question in the comments section recently about FHA reverse mortgages and the appraisal process for them. “We have a detached garage with a 500 square foot “mother-in-law unit” on top. Will this structure be included in the appraisal in which the reverse mortgage is based on?”
FHA loan rules for appraisals are found in HUD 4000.1. Before quoting the rules for appraising what the FHA loan rule book classifies as an “accessory dwelling unit” or ADU, it’s important to remember that state law, and certain building code requirements may also apply.
FHA appraisals include determining whether an outbuilding is an ADU or not. The FHA definition of an ADU is as follows:
“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.”
FHA loan requirements for the appraisal state:
“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.”
“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.”
The answer to the reader’s question will be found in the next line of this set of rules, which is found in HUD 4000.1 on page 499:
“The Appraiser must not include the living area of the ADU in the calculation of the Gross Living Area (GLA) of the primary dwelling.”
So to restate; according to FHA loan rules, if the structure is question is classified as an ADU, it cannot be included in the gross living area for purposes of the appraisal. However, state law, lender standards, and building code may all have additional input where applicable. This is true of FHA reverse mortgages and forward mortgages alike.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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