What Is An Accessory Dwelling Unit And Why Might You Want One?

Kevin GrahamOctober 12, 2019

The housing market is pretty tight right now. For some of the market, finding affordable housing with the features they want is a bit of a challenge. To get a real sense for how competitive the market is right now, you need only look at recent existing home sales numbers.

According to the latest data released by the National Association of REALTORS®, supply in the market at the current sales pace is down to 4.2 months nationwide. This has led to a real advantage for sellers. For context, local housing markets are considered to be in balance when there’s about 6 months’ worth of available inventory.

Inventory levels are slightly better in the market for new homes, but buyers have to pay a premium for shiny and new homes. According to the U.S. Census Bureau, the median price for a new home was $312,800 in July of 2019.

In this market, homeowners in the right situation may choose to get creative with their housing solutions in order to help out family or friends who may be having trouble finding a place of their own. Today, we’ll talk about ways you might be able to utilize accessory dwelling units.

What Does Accessory Dwelling Unit Mean?

Accessory dwelling units have been called many things throughout the years. You may see them referred to as either “granny flats” or “mother-in-law suites” despite the fact that living there isn’t restricted to these two family members. It may also be called a carriage house, accessory apartment, rental unit, extra unit or additional unit. Those living in Hawaii (I’m jealous) may refer to them as “Ohana Units.”

Whatever you call them, accessory dwelling units are secondary living spaces on land zoned for a single-family residence. They can be detached units on the same land, but they may also be a built-in living space above an existing garage or in a basement. These wouldn’t have interior access to the main residence.

The accessory dwelling unit has to be its own living area. This means that it has to have a fully functional kitchen along with a full bathroom and living area. It may or may not be rented.

What’s the Difference Between An Accessory Dwelling Unit And A Multifamily Residence?

One thing you might be wondering about is the difference between a single-family residence with an accessory unit and a multifamily residence. That’s a reasonable question because multiunit residences usually mean a higher down payment on a purchase or increased equity needed in a refinance.

The easiest way to explain this is to take a look at what multiunit residences have that single-family residences typically lack.

Multifamily properties typically feature separate utilities. This wouldn’t be the case with a single-family residence that has an accessory unit, as utilities are shared. Additionally, the main home would share the same address as the accessory dwelling unit. Properties with multiple units have different addresses.

An appraiser might also choose to classify your property as having two units if they can’t find other comparable properties with attached dwelling units in the area.

How Much Does An Accessory Dwelling Unit Cost?

Construction costs on an accessory dwelling unit are going to vary widely because the cost of construction materials and labor as well as building codes can have wide variations from one locale to the next. However, there are some inferences we can make from the data that’s available.

The Materials Management office within the Department of Environmental Quality in Oregon took a look at the market for accessory dwelling units in Portland in 2014. The median cost at the time for an attached accessory unit was $45,500. For a comparable detached unit, the median cost was $90,000.

Attached accessory units may be cheaper than detached ones because you don’t have to run new plumbing connections, do new wiring or put up new walls and a roof.

What Are The Rules Around Accessory Dwelling Units?

When it comes to accessory dwelling units, there are two sets of rules you need to pay attention to. The first involves local ordinances. The second is whether you can qualify for a mortgage.

Understand Local Zoning Ordinances And Building Codes

The first thing you need to research is whether there’s a legal way to build an accessory dwelling unit in your area and what the rules are. This means you’ll have to do some searching of local ordinances and building codes to know what’s possible.

As an example of regulations that may be in place, there may be limits to the square footage of the unit as compared to the rest of your house. Additionally, some localities may have restrictions on where you can construct the unit (e.g., not in the basement). Others may have limited guidance in this area, so it’ll be important to pull permits and consult city officials.

It’s a good idea to get bids for your job. A reputable contractor should be able to go through what’s possible and find the best solution for you that’s aligned with your goals as well as the law.

Mortgage Considerations

The good news is that most major mortgage investors will let you have an accessory dwelling unit on the same site as your main single-family residence without much trouble. That said, there are definitely things to pay attention to.

For example, you can’t finance a property through USDA with an accessory dwelling unit with Quicken Loans.1

The usage must be in accordance with local zoning ordinances. If your area is mum on the subject of granny flats or the use doesn’t match what local regulations allow for, you may still be able to get financing if the appraiser can find comparable properties in the area that have this feature.

You can only have one accessory dwelling unit on your property. That accessory dwelling unit has to have shared utility connections and a shared address with the main home. If it doesn’t, it’ll likely be considered a multiunit property.

Finally, you can rent out your accessory dwelling unit, but whether the income from the rental can be considered when you’re trying to qualify will depend on the mortgage investor in your loan.

If you’re looking into building a unit of your own, one option would be to do a cash-out refinance. On a conventional or FHA loan, you can take cash out as long as you leave at least 20% equity in the home and you have a median FICO® Score of 620 or higher. If you happen to qualify for a VA loan as an eligible active-duty servicemember, reservist, veteran or surviving spouse of someone who passed in action or as a result of a service-connected disability, you may be able to take out up to the full amount of your home equity as long as you have a median FICO® Score of 680 or higher. VA eligible individuals with scores of 580 or higher can take cash out and only leave 10% equity.

Uses For Accessory Dwelling Units

Accessory dwelling units may be attractive for young people who are having a hard time finding a home that’s affordable and meets their needs. This gives them the option of having their own space that’s still within budget.

These may also be great if you have aging parents who may wish to downsize so they don’t have as much house to take care of. It’s also very easy to look in on them periodically while letting them maintain as much autonomy as possible and for as long as possible.

If you’re interested in refinancing to build your own accessory dwelling unit, you can get started online with Rocket Mortgage® by Quicken Loans or give one of our Home Loan Experts a call at (800) 785-4788.

1Quicken Loans® and Rocket Homes Real Estate LLC are separate operating subsidiaries of Rock Holdings Inc. Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation, and applicable legal and regulatory requirements.

As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.

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    Kevin Graham

    Kevin Graham is a Senior Blog Writer for Quicken Loans. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Quicken Loans, he freelanced for various newspapers in the Metro Detroit area.