B2-3-04, Special Property Eligibility Considerations (10/04/2023)

An ADU is typically an additional living area independent of the primary dwelling that may have been added to, created within, or detached from a primary one-unit dwelling. The ADU must provide for living, sleeping, cooking, and bathroom facilities and be on the same parcel as the primary one-unit dwelling.

The following table describes the requirements for classifying an ADU.

Construction of an ADU

The construction method of an ADU can be site- or factory-built, including modular, and single- or multi-width HUD Code manufactured homes that are legally classified as real property. If an ADU is present, the primary dwelling must be site-built or a modular home. If the ADU is a HUD Code manufactured home, the lender must verify the following:

• the property was built in compliance with the Federal Manufactured Home Construction and Safety Standards (established June 15, 1976, as amended and in force at the time the home was manufactured),

• it is attached to a permanent foundation system in accordance with the manufacturer’s requirements for anchoring, support, stability, and maintenance,

• the foundation system must be appropriate for the soil conditions for the site and meet local and state codes,

• it is encumbered by the mortgage with the primary dwelling, and

• additional requirements that appear in HUD regulations in 24 C.F.R. Part 3280.

Compliance with these standards will be evidenced by photos of the HUD Data Plate or HUD Certification Label(s) (for each section of the home) in the appraisal. If the original or alternative documentation cannot be obtained for the HUD Data Plate or the HUD Certification Label(s), the loan is not eligible for sale to Fannie Mae. See B2-3-02, Special Property Eligibility and Underwriting Considerations: Factory-Built HousingB2-3-02, Special Property Eligibility and Underwriting Considerations: Factory-Built Housing, for more information.

Examples of ADUs

Examples of ADUs include, (but are not limited to):

• a living area over a garage,

• a living area in a basement,

• a small addition to the primary dwelling, or

• a manufactured home (legally classified as real property).

Whether a property is defined as a one-unit property with an accessory unit or a two- to four-unit property will be based on the characteristics of the property, which may include, but are not limited to, the existence of separate utility meter(s), a unique postal address, and whether the unit can be legally rented. The appraiser must determine compliance with this definition as part of the analysis in the Highest and Best Use section of the appraisal. See B4-1.3-05, Improvements Section of the Appraisal ReportB4-1.3-05, Improvements Section of the Appraisal Report for additional ADU appraisal requirements.

Zoning for an ADU

Some ADUs may predate the adoption of the local zoning ordinance and therefore be classified as legal nonconforming. An ADU should always be considered legal if it is allowed under the current zoning code for the subject property.

If it is determined that the property contains an ADU that is not allowed under zoning (where an ADU is not allowed under any circumstance), the property is eligible under the following additional conditions:

• The lender confirms that the existence will not jeopardize any future property insurance claim that might need to be filed for the property.

• The appraisal requirements related to zoning for an ADU are met. See B4-1.3-05, Improvements Section of the Appraisal ReportB4-1.3-05, Improvements Section of the Appraisal Report

The table below provides the requirements when the security property consists of more than one parcel of real estate.

Fannie Mae purchases or securitizes mortgages that are secured by properties that have a business use in addition to their residential use, such as a property with space set aside for a day care facility, a beauty or barber shop, or a doctor’s office.

The following special eligibility criteria must be met:

• The property must be a one-unit dwelling that the borrower occupies as a principal residence.

• The borrower must be both the owner and the operator of the business.

• The property must be primarily residential in nature.

• The dwelling may not be modified in a manner that has an adverse impact on its marketability as a residential property.

See  B4-1.4-07, Mixed-Use Property Appraisal RequirementsB4-1.4-07, Mixed-Use Property Appraisal Requirements, for appraisal considerations.

Fannie Mae will only purchase or securitize mortgage loans secured by properties that are located within lava zones 3 through 9 on the island of Hawaii. Properties in lava zones 1 and 2 are not eligible due to the increased risk of property destruction from lava flows within these areas.

Hawaiian lava flow maps and other information are available online at the U.S. Geological Survey Hawaiian Volcano Observatory website.

The ownership and debt financing structures commonly found with solar panels are key to determining whether the panels are third-party owned, personal property of the homeowner, or a fixture to the real estate. Common ownership or financing structures include:

• borrower-owned panels,

• leasing agreements,

• separately financed solar panels (where the panels serve as collateral for debt distinct from any existing mortgage); or

• power purchase agreements.

Fannie Mae will purchase or securitize a mortgage loan on a property with solar panels. If the borrower is, or will be, the owner of the solar panels (meaning the panels were a cash purchase, were included in the home purchase price, were otherwise financed and repaid in full, or are secured by the existing first mortgage), our standard requirements apply (for example, appraisal, insurance, and title).

Properties with solar panels and other energy efficient items financed with a PACE loan are not eligible for delivery to Fannie Mae if the PACE loan is not paid in full prior to or at closing. For additional information, see B5-3.4-01, Property Assessed Clean Energy LoansB5-3.4-01, Property Assessed Clean Energy Loans.

Lenders are responsible for determining the ownership and any financing structure of the subject property’s solar panels in order to properly underwrite the loan and maintain first lien position of the mortgage. When financing is involved, lenders may be able to make this determination by evaluating the borrower’s credit report for solar-related debt and by asking the borrower for a copy of all related documentation for the loan. The lender must also review the title report to determine if the related debt is reflected in the land records associated with the subject property. If insufficient documentation is available and the ownership status of the panels is unclear, no value for the panels may be attributed to the property value on the appraisal unless the lender obtains a UCC “personal property” search that confirms the solar panels are not claimed as collateral by any non-mortgage lender.

Note: A Uniform Commercial Code (UCC) financing statement that covers personal property and is not intended as a “fixture filing” must be filed in the office identified in the relevant state’s adopted version of the UCC.

Lenders are responsible for ensuring the appraiser has accurate information about the ownership structure of the solar panels and that the appraisal appropriately addresses any impact to the property’s value. Separately financed solar panels must not contribute to the value of the property unless the related documents indicate the panels cannot be repossessed in the event of default on the associated financing. Any contributory value for owned or financed solar panels must comply with Energy Efficiency Improvements in  B4-1.3-05, Improvements Section of the Appraisal ReportB4-1.3-05, Improvements Section of the Appraisal Report .

The following table summarizes some of the specific underwriting criteria that must be applied depending on the details of any non-mortgage financing for the solar panels.

*A fixture filing is a UCC-1 financing statement authorized and made in accordance with the UCC adopted in the state in which the related real property is located. It covers property that is, or will be, affixed to improvements to such real property. It contains both a description of the collateral that is, or is to be, affixed to that such property, and a description of such real property. It is filed in the same office that mortgages are recorded under the law of the state in which the real property is located. Filing in the land records provides notice to third parties, including title insurance companies, of the existence and perfection of a security interest in the fixture. If properly filed, the security interest in the described fixture has priority over the lien of a subsequently recorded mortgage.

If the solar panels are leased from or owned by a third party under a power purchase agreement or other similar lease arrangement, the following requirements apply (whether to the original agreement or as subsequently amended).