Can You Use Rent From an Unpermitted ADU to Qualify for a Mortgage?

Quick answer: It depends on which agency’s rules the loan is written to, and that is not something a homeowner can see from the outside. Freddie Mac states that rental income from an illegal ADU may not be used to qualify. FHA requires the unit to comport with zoning requirements, which may include a legal nonconforming use. The Fannie Mae provisions we examined state no such condition, though for an ADU that does not comply with zoning, Fannie’s property rules require confirmation that insurance coverage is not affected and an appraisal supported by comparable sales. That is a narrower statement than it may look: it means the published ADU rental income provisions do not impose a legality condition, not that no condition exists anywhere in Fannie’s rules.

Separately, California law gives owners of units built before January 1, 2020 a narrower permit path than most coverage suggests.

This is educational information. Solve Lending & Realty is a mortgage and real estate brokerage, not a law firm. Legalizing a unit is a city process we do not run, and local procedures vary. Confirm anything here with your city building department, or with a California real estate attorney for HOA and title questions.

Three agencies, three answers

Most homeowners with a garage conversion have been told the same thing: it is a liability, and nothing good happens until it is legal. For two of the three agencies, that instinct is right. For the third, the question moves to the appraisal.

Freddie Mac is the strictest. Its ADU fact sheet requires that the unit be allowed per zoning and land use requirements, meaning legal, legal non-conforming, or in an area with no zoning, and states directly that rental income from an illegal ADU may not be used to qualify.

FHA takes a similar position. Mortgagee Letter 2023-17, issued October 16, 2023, permits ADU rental income as Effective Income, capped at 30 percent of total monthly Effective Income, and requires that the ADU comport with zoning requirements, which may include a legal nonconforming use. Cash-out refinances are excluded.

On legality, Freddie and FHA land in the same place; they differ on caps, how income is counted and which transactions qualify.

Fannie Mae‘s published ADU income provisions read differently. Announcement SEL-2025-08 and the current Selling Guide sections on rental income do not condition ADU income on the unit being permitted. In the rental-income text we read, the words legal, zoning and permit do not appear as a condition.

Worth being careful about what that establishes. It means those provisions state no legality condition. It does not mean no condition exists anywhere in Fannie’s rules, and it does not mean a lender will treat an unpermitted unit the same way, since lenders apply their own overlays on top of agency requirements.

Fannie puts the constraint somewhere else. Selling Guide B2-3-04 contemplates a property with an ADU that is not allowed under zoning remaining eligible, subject to conditions: insurance coverage must not be jeopardized, and under B4-1.3-05 the appraisal must demonstrate the improvements are typical for the market through an analysis of at least two comparable sales with the same non-compliant zoning use, with a minimum of three settled sales.

That is a real constraint, just a different one. In some neighborhoods that is hard; in others it is straightforward. It depends on the market, which means it depends on the appraiser, which means nobody can tell you the answer in advance.

VA has no provision that addresses ADU rental income specifically, as far as we could find. Its rental-income rules are written for multi-unit properties where the Veteran lives in one unit, and its property rules require compliance with zoning. With no ADU-specific rule to point to, ask the lender how it would treat the unit and its rent on a VA loan before you assume anything.

What changed in March 2026

Under Announcement SEL-2025-08, dated October 8, 2025, and implemented in Desktop Underwriter version 12.1 the weekend of March 21, 2026, Fannie Mae permits rental income from an ADU to be considered toward qualifying income where all of the following hold: the property is a one-unit principal residence, the transaction is a purchase or a limited cash-out refinance, the income comes from one ADU even where the property has more than one, and the amount used is limited to 30 percent of the borrower’s total qualifying income.

Cash-out refinances are not on that list, which is how they are excluded.

There is a second limit that gets far less attention, and Fannie describes it two ways. Its ADU income fact sheet dated November 14, 2025 says that where a borrower has fewer than 12 months of property management experience and has a housing payment, the qualifying rental income cannot exceed that housing payment. Selling Guide B3-3.8-01, as updated September 2, 2026, ties positive rental income to 12 months of property management experience without stating that housing-payment ceiling. Which reading a lender applies is a question for the lender. Either way, a Single-Family Comparable Rent Schedule, Form 1007, is required in addition to the standard appraisal, with a signed lease on a purchase or recent tax returns on a refinance.

For a first-time landlord, the experience rule is the one to ask about before the 30 percent cap.

Freddie Mac reaches a similar caution by a different route: ADU rent can be considered only on a purchase or a no-cash-out refinance, never a cash-out; the amount used cannot exceed 30 percent of qualifying income or 75 percent of the lease or market rent; a full appraisal is required; and on a purchase, at least one borrower completes a landlord education program unless they have about a year of management experience.

Whether any of this helps a specific file depends on the appraisal, the lease, the borrower’s history and the lender’s own overlays. None of it is automatic.

One thing is the same across all three: none of Fannie, Freddie or FHA counts ADU rent on a cash-out refinance. If your refinance would take cash out, the rent will not help you qualify for it, and a second mortgage or HELOC that leaves your first mortgage in place may be the better thing to compare. It still has to qualify on its own income, credit and equity, it is secured by your home like any mortgage, and whether that lender counts the ADU rent is its own question.

Because lenders add their own rules on top of the agency’s, the same file can get different answers from different lenders. As a broker we can put the question to more than one; nobody can promise the answer.

Who this fits, and who it does not

It fits owners of a unit built before January 1, 2020 who want to know their options, and buyers or limited-cash-out refinancers on a one-unit principal residence where the rent may count.

It does not fit: cash-out refinances (no agency counts ADU rent on one); units built in 2020 or later (no section 66311.7 path); buildings deemed substandard under Health and Safety Code section 17920.3 (the section does not apply); investment properties under the Fannie rule; and anyone counting on rent from a unit that is not built yet, which none of the provisions we read describe.

If you plan to sell, the unit’s permit status affects which loans your buyer can use to count its rent and what the appraiser has to support, so whether to legalize before listing is worth pricing out now. If you are buying, the unit’s permit history and the loan program have to be matched before you are in contract. If the house belongs to parents facing tax or insurance pressure, legalizing is one option; keeping, borrowing against, or selling the house are the others, and that is the call to make first.

What California’s permit path actually says

Government Code section 66311.7 (formerly section 66332, amended by AB 2533, Chapter 834, Statutes of 2024, and renumbered by SB 543 effective January 1, 2026) provides that a local agency shall not deny a permit for an unpermitted ADU or JADU constructed before January 1, 2020 on either of two grounds: that the unit violates building standards, and that it does not comply with state ADU law or a local ADU ordinance.

Note what that does and does not do. It bars denial on two enumerated grounds. It does not create a right to a permit.

Two sentences decide whether it reaches you, and most summaries skip both.

Subdivision (b) provides that a local agency may deny the permit if it finds that correcting the violation is necessary to comply with the standards in Health and Safety Code section 17920.3.

Subdivision (c) provides that the section does not apply at all to a building deemed substandard under that same section.

So the path turns on Health and Safety Code section 17920.3: a violation that must be corrected to meet it can be grounds for denial, and a building deemed substandard under it is outside the section entirely. That is the difference between a plan and a wasted filing fee.

On fees, subdivision (e) provides that a homeowner shall not be required to pay impact fees or connection or capacity charges, except where utility infrastructure is required to comply with section 17920.3 and the fee is authorized by section 66311.5(e). Both conditions have to be met for the exception to apply.

An inspection is permissive. Subdivision (f) says an inspector may inspect for compliance with health and safety standards, and that subdivision is expressly subject to subdivision (c).

The statute contains no sunset provision. But the qualifying cohort is fixed and receding, because the unit has to predate January 1, 2020. Check your city’s bulletin for what proof of the construction date it accepts.

The most useful sentence in the statute

Subdivision (d) requires local agencies to inform the public about this section, including a checklist of the conditions in Health and Safety Code section 17920.3 that would deem a building substandard, and informing homeowners that before submitting an application they may obtain a confidential third-party code inspection from a licensed contractor to determine the unit’s existing condition or the potential scope of building improvements. The statute’s list of what makes a building substandard includes inadequate sanitation, hazardous wiring, hazardous plumbing and inadequate exits, which is where garage conversions most often need work.

That is the sentence to act on. It lets an owner learn what they are actually looking at before filing anything with the city and before choosing a loan structure that may depend on the answer. Choose your own licensed contractor; you can check a license with the Contractors State License Board.

The clocks

Government Code section 66317 sets two deadlines with two different consequences.

If a permitting agency does not make a timely completeness determination, the application is deemed complete.

If the agency has not approved or denied a completed application within 60 days, the application is deemed approved. The 60 days runs from the agency’s receipt of a completed application, not from submission, and the subdivision contains a carve-out where the ADU application accompanies a permit application for a new primary dwelling.

These clocks are written for applications to create an ADU or JADU; whether a city applies them to a legalization application under section 66311.7 is a question for its building department, and we cannot tell you how long your city takes.

HOAs

Civil Code section 4751 makes void and unenforceable any governing-document provision that effectively prohibits or unreasonably restricts the construction or use of an ADU or JADU on a lot zoned for single-family residential use.

It does not reach what the statute calls reasonable restrictions, defined as restrictions that do not unreasonably increase the cost to construct, effectively prohibit construction, or extinguish the ability to otherwise construct. Whether a particular restriction crosses that line is a fact question.

A companion section, Civil Code section 714.3, provides in subdivision (b) that reasonable restrictions under that section shall not include any fees or other financial requirements.

From January 1, 2027, AB 956 extends both sections to lots zoned to allow single-family residential use, which can reach lots in zones that permit single-family homes alongside other uses, not only lots zoned for single-family use. (Summary of the enrolled text.)

Owner occupancy, and one date that differs by a day

Government Code section 66315 provides that no standards other than those in section 66314 shall be used or imposed on a proposed ADU on a lot with a proposed or existing single-family dwelling, including an owner-occupant requirement, except that a local agency may require the property be used for rentals of terms 30 days or longer.

For junior ADUs, AB 1154, Chapter 507, Statutes of 2025, effective January 1, 2026, changed section 66333(b) so that the owner-occupancy requirement a local ordinance must impose now applies only where the JADU has shared sanitation facilities with the existing structure. Units owned by a governmental agency, land trust, or housing organization are also exempt.

Note the one-day discrepancy: section 66333(g) requires that a JADU rental be for a term longer than 30 days, while section 66315 refers to 30 days or longer for ADUs. They are worded differently and should not be merged into a single rule.

Which cities and counties have published a procedure

We could confirm published AB 2533 amnesty procedures in the City of Los Angeles (LADBS Information Bulletin P/BC 2026-161, effective July 15, 2026, revised August 5, 2026), the City of San Diego (Information Bulletin 242, May 2026), unincorporated Orange County, and the City of Riverside.

LADBS covers the City of Los Angeles only. If you live in Whittier, Long Beach, Pasadena or another city, your own city’s building department is the one to ask. Unincorporated Orange County’s procedure does not cover cities such as Anaheim, Santa Ana or Irvine, which run their own building departments.

We could not find published county-level procedures for unincorporated Los Angeles County or unincorporated Riverside County. We did not survey San Diego County’s unincorporated areas or the county’s other cities. That does not mean no path exists there. It means you should ask your building department directly rather than assuming.

Coastal and fire-zone properties may have extra review; ask your city.

Ask your county assessor how a newly permitted unit is assessed.

What the Governor signed on September 29

Two ADU bills were signed on September 29, 2026 and take effect January 1, 2027. Neither amends Government Code section 66311.7, the pre-2020 permit path described above, or the section 66317 clocks.

SB 1117 changes how impact fees are charged on larger new ADUs. Units of 750 square feet or less, and junior units of 500 square feet or less, already pay no impact fee. From January 1, 2027, for up to two ADUs on a lot, a city may charge an impact fee on a unit over 750 square feet only on the area above 750 square feet, still scaled to the size of the main house. On a lot with three or more ADUs the fee still applies to the whole unit. Utility connection fees, capacity charges and school fees are not affected.

AB 956 requires a city to approve up to two detached new ADUs, instead of one, on a lot with a single-family home under the state’s streamlined standards. A city may cap each at 800 square feet of livable space and apply the usual height and four-foot setback rules. There is a trade: once two detached ADUs are built under that path, the city is not required to also approve a junior ADU on the same lot. The same bill extends the rule that voids HOA and deed restrictions on ADUs to lots zoned to allow single-family use.

Chapter numbers had not been assigned when this was written. This summary is based on the bill text as published by the Legislature at leginfo.legislature.ca.gov.

One warning worth repeating in full

CalHFA’s ADU grant page states that the latest round of funding has been fully allocated, on a notice dated December 28, 2023, and adds: “If anyone approaches you saying they can help you get an ADU Grant, it is a financial scam.”

Solve Lending & Realty does not offer, broker, or assist with CalHFA ADU grants. We are quoting that warning because it is aimed at exactly the kind of intermediary a homeowner researching this topic is likely to be approached by.

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