Why It Matters
Rural borrowers seeking to buy or build a home with a rentable accessory dwelling unit (ADU) will be eligible for a USDA guaranteed loan beginning Dec. 28, after the Agriculture Department's Rural Housing Service (RHS) lifted longstanding restrictions on such properties under its Single Family Housing Guaranteed Loan Program (SFHGLP).
The agency received 28 public comments after publishing the proposed rule March 31 and adopted the final rule without modification approximately seven months later, citing growing demand for affordable housing and limited land availability in rural communities.
The Big Picture
Before this rule, SFHGLP regulations barred loan guarantees for properties principally used for income-producing purposes and for buildings designed to accommodate a business or income-producing enterprise, with no explicit exceptions for income-producing accessory dwelling units or home-based operations. RHS says ADUs can expand a community's housing supply, provide more affordable options for low- and moderate-income residents and give borrowers a means to generate additional income, supporting the broader goal of increasing affordable housing stock and promoting long-term homeownership stability.
The agency did not provide an estimate of how many borrowers or properties the rule will reach and stated that the rule does not involve a new or expanded program requiring more action from small businesses than large entities
What Changes
Currently, 7 CFR § 3555.102 restricts the purchase or improvement of land or buildings typically used principally for income-producing purposes under paragraph (b) and the purchase or construction of buildings designed to accommodate a business or income-producing enterprise under paragraph (c), with no explicit exceptions for ADUs or qualifying home-based businesses.
Starting Dec. 28, both paragraphs will include explicit exceptions. Paragraph (b) will allow loan guarantees for otherwise qualifying properties containing or planned to contain one or more ADUs. Paragraph (c) will exempt properties with design features accommodating home-based businesses, including childcare, product sales or craft production, that do not require specific commercial real estate features.
The site eligibility rule at 7 CFR § 3555.201(b)(2) currently prohibits sites with land or buildings principally used for income-producing purposes. The rule adds an exception for otherwise qualifying properties that contain or are planned to contain one or more ADUs. Vacant land without eligible residential improvements and property used primarily for agriculture, farming, or commercial enterprise will remain ineligible.
The rule also adds two definitions to 7 CFR § 3555.10. An "Accessory Dwelling Unit" is defined as a habitable living unit within or detached from a single-family dwelling, subordinate in size, with separate means of ingress and egress, that together with the primary dwelling constitutes a single interest in real estate. A "Living Unit" must meet minimum habitability standards covering potable water, sanitation, heating, electricity, kitchen facilities and a bathroom.
What Stays the Same
Properties requiring specific commercial real estate features remain ineligible under paragraph (c), and the prohibition on properties principally used for income-producing purposes continues to apply to non-ADU income-producing properties under paragraph (b).
Potential ADU rental income will not be included in borrower income calculations. RHS said that potential income from an ADU falls under existing 7 CFR § 3555.152(a)(3), which prohibits lenders from using income to calculate an applicant's ratios if its source cannot be verified, it is not stable or it is unlikely to continue. This rule does not change that provision. Non-income-producing ADUs were already eligible for SFHGLP financing and remain so.
The Fight Over the Rule
Of the 28 respondents, 19 supported the proposed rule, stating that it would accommodate more buyers in rural America.
Four respondents supported the rule but recommended expanding eligibility to small home-based operations with commercial real estate features, along with clarifying ADU eligibility and income. RHS responded that the amendment to 7 CFR § 3555.102(c) will permit qualifying properties with home-based businesses, while § 3555.102(b) will continue to prohibit properties principally used for income-producing purposes.
One respondent agreed that the proposal would expand housing opportunities but raised concerns about consistent enforcement, broader policy implications and RHS' statutory authority. RHS responded that the changes fall within the authority granted by the Housing Act of 1949 (42 U.S.C. 1471 et seq.) and that ADUs support the agency's rationale for expanding affordable housing.
Another respondent supported the proposal but recommended addressing ADU and room rental income. RHS reiterated that potential ADU income would not be included in borrower income calculations. Two additional respondents supported the proposal and suggested changes involving homebuyer education, home-based operations, renovation funding, non-income-producing ADUs and property standards. One comment was unrelated to the rule. The rule takes effect Dec. 28, 60 days after its Oct. 29 publication.
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