What Happened?

If you're looking to buy a rural home with a rentable in-law suite or a backyard cottage, a federal loan guarantee program will now cover that from Dec. 28 onwards. The USDA's Rural Housing Service (RHS) has lifted the long-standing ban on such properties. RHS published the final rule on Oct. 29, according to a Legis1 review of the Single Family Housing Guaranteed Loan Program (SFHGLP) rule. ​

Before this rule, SFHGLP regulations prohibited loan guarantees for income-producing properties, with no exception for accessory dwelling units (ADUs), which are habitable dwelling units in or attached to a single-family home. The new rule contains specific exceptions:

  • ADU properties: Loan guarantees now cover qualifying homes that contain, or are intended to contain, one or more ADUs.
  • Home-based businesses: those with features that would make them suitable for home-based work (e.g., childcare or product sales) are eligible as long as they don't require any commercial real estate features.
  • Ineligible properties: Vacant land, farming properties, and commercial enterprises are all out.

Why Does it Matter to Me?

The Rural Housing Service says allowing ADUs under the program would increase housing supply in rural communities and give low- and moderate-income borrowers an additional income source to support long-term homeownership. There is a caveat, though: lenders cannot count any rental income from an ADU as part of the borrower's qualifying income, as the current program rules do not allow for income that is unverifiable or likely to be non-existent.

Both Sides, Now

Of the 28 commenters who responded after RHS proposed the rule on March 31st, 19 supported it in full, saying it would allow more buyers in rural America. Four others supported the proposal but asked RHS to go further on eligibility and be more specific about how ADU income would be treated.

One commenter agreed the rule would lead to more housing opportunities but questioned the consistency of enforcement, the wider policy implications, and whether RHS had the legal authority to make the change. RHS responded that the changes fall within the authority Congress conferred under the Housing Act of 1949 and that ADUs align with the agency's objective of increasing the supply of affordable housing.

What Happens Next?

The rule goes into effect on Dec. 28 (60 days after its Oct. 29 publication). From Dec. 28 onward, borrowers who are buying or building a home that includes a rentable accessory dwelling unit will be eligible for a USDA-guaranteed loan. The rule did not change the existing restriction on using ADU rental income as part of a borrower's qualifying income, and that restriction remains in place.

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