Can ADU Income Help You Qualify on the Riviera?

If you love the Riviera’s views but worry about qualifying, you are not alone. Many buyers and owners look to an accessory dwelling unit as a way to offset payments. The good news is that lenders may count legally permitted ADU rent toward your qualifying income. In this guide, you will learn which loan programs allow it, what documents you will need, and the local Santa Barbara rules that matter on the Riviera. Let’s dive in.

The short answer

Yes, ADU income can help you qualify when the unit is legal, properly documented, and supported by an appraisal. FHA now permits ADU income in many scenarios, and conventional programs like Fannie Mae’s HomeReady and Freddie Mac have pathways with specific requirements. Always confirm your plan with a lender early and make sure your ADU complies with City of Santa Barbara rules, including short-term rental restrictions. You will find the key program details below.

When lenders count ADU income

FHA

FHA updated its policy to allow ADU rental income for qualifying in many cases. For an existing, permitted ADU, lenders can often use 75 percent of the appraiser’s market rent estimate. If you are adding an ADU with an FHA 203(k), lenders may count 50 percent of projected rent subject to program rules. See the FHA policy update for details in the HUD announcement.

Fannie Mae

Fannie’s HomeReady product allows rental income from an accessory unit on a one-unit primary residence. Lenders typically need an appraisal rent schedule or Form 1007 to support market rent, plus standard rental income documentation. Review the HomeReady guidance on accessory unit income and Fannie’s rental income documentation rules.

Freddie Mac

Freddie permits ADU income on a one-unit primary residence for purchases and certain refinances when strict conditions are met. Requirements often include an appraisal with rental analysis, at least one comparable sale with a rented ADU, and rental comps. Freddie also limits the portion of qualifying income from an ADU to about 30 percent and may require landlord education or experience. Learn more in Freddie’s ADU guidance.

VA and non-agency options

VA can allow rental income in some situations, but lender overlays and documentation standards vary, so discuss specifics with a VA-experienced lender. If traditional programs will not accept the income today, some portfolio or non-QM products may consider property cash flow with different pricing and rules. A lender can walk you through the tradeoffs.

What documents you will need

Every lender and loan program sets its own checklist, but most will ask for some combination of these items:

• Proof of legal status: building permits and certificate of occupancy showing the ADU is permitted under local codes. Fannie and FHA both flag legal status as a key eligibility factor. See Fannie’s property eligibility guidance.
• Appraisal with rent analysis: an appraiser’s market rent opinion and, when required, a Form 1007 or similar rent schedule. Freddie and Fannie tie acceptance of ADU income to specific appraisal exhibits. Review Freddie’s ADU appraisal expectations.
• Leases and rental history: signed lease agreements if a tenant is in place, plus bank statements or cancelled checks showing receipt of rent when requested. Fannie’s rental income rules outline common documentation.
• Tax returns: Schedule E from your federal return if you have at least 12 months of reported rental income. Lenders often rely on tax history to demonstrate stability.
• Short-term platform statements: if you host, some lenders may review platform proof of income. See Airbnb’s guidance on documentation available to hosts. Only legal, permitted rentals are considered.

How appraisals and calculations work

• Identification and analysis: appraisers must identify the ADU, describe its features, and provide an opinion of market rent. FHA created ADU-specific fields for appraisers after its 2023 policy update. See the HUD policy update.
• Documentation exhibits: conventional loans usually need a rent schedule and rental comp data. Freddie often requires at least one comparable sale with an ADU that was rented.
• Qualifying math: lenders apply program rules to the appraiser’s rent figure or your tax-documented income. Examples include FHA at 75 percent of market rent for existing units, 50 percent for new units under 203(k), and Freddie’s cap that limits the ADU portion of total qualifying income.

Riviera-specific rules and realities

City permitting and a faster path

The City of Santa Barbara launched a Preapproved ADU Program that offers preapproved plans and expedited review for certain detached ADUs. This can shorten timelines and reduce costs for eligible properties on the Riviera. Explore the City’s Preapproved ADU Program to see if your lot qualifies.

Short-term rentals are restricted

Santa Barbara actively enforces short-term rental rules, and many residential areas do not allow unhosted stays under 30 days. Using your ADU as an illegal short-term rental risks fines and can jeopardize a lender’s acceptance of the income. Review the City’s Short-Term Rental Enforcement Program before you count STR income in any loan scenario.

City versus County

Parts of the Riviera fall within the City of Santa Barbara, while nearby areas may be in unincorporated County with different ADU processes and coastal zone rules. For a high-level overview of state law and local implementation, see the California HCD ADU Handbook. Always confirm which jurisdiction governs your specific address.

Reality check on rent

Santa Barbara rents are high compared to many markets, and Riviera locations often command a premium. Lenders will rely on the appraiser’s market rent or your tax-documented history. Use that figure for planning rather than online anecdotes to avoid surprises during underwriting.

Taxes and operating details that affect approval

• Reporting income: if you rent more than 14 days in a year, you generally report income and expenses on Schedule E. Many lenders use these returns to verify stable rental income. See IRS Publication 527.
• Vacancy and expenses: underwriting often applies a vacancy or expense factor when there is limited rental history. Expect the lender to size income conservatively.
• Property features: separate entrance, proper egress, kitchen and bath, and separate utilities can influence both appraisal and insurability. Appraisers note these items and lenders consider them during review.

A simple Riviera ADU income checklist

1. Verify permits and legal status for the ADU with the City or County. Start with the City’s Preapproved ADU Program for guidance.
2. Confirm short-term rental rules at your address. The City’s enforcement program is active.
3. Speak with a lender early to learn which program fits your scenario and which documents they will require. FHA, HomeReady, and Freddie have different rules.
4. Order an appraisal that identifies the ADU and includes a rent analysis or Form 1007 when required.
5. Gather leases, bank statements, and two years of tax returns with Schedule E if available.
6. Estimate qualifying income using the appraiser’s rent and the program’s calculation, such as FHA at 75 percent for existing ADUs.
7. If you need alternatives, ask about portfolio or non-QM options, or plan to establish a 12-month rental history before reapplying.

How this helps Riviera buyers and sellers

If you are buying, permitted ADU income can make a meaningful difference in qualifying, especially under FHA or HomeReady. For owners, a documented, legal ADU with strong appraiser support can widen your buyer pool and highlight ongoing value. In both cases, the key is clean permitting, realistic rent support, and early lender alignment.

If you want a clear, tailored path to your Riviera goals, connect with Amanda Watkins for concierge guidance and a step-by-step plan from financing through closing.

FAQs

Can ADU income help me qualify for a mortgage on the Riviera?

• Yes, when the ADU is legal and documented. FHA, Fannie Mae, and Freddie Mac each allow ADU income under specific rules, and lenders rely on appraisals and leases or tax returns to verify stability.

How much of my ADU rent will a lender count?

• It depends on the program. FHA often uses 75 percent of market rent for existing units and 50 percent for new units under 203(k). Freddie caps the ADU share of total qualifying income at about 30 percent. Your lender will run the exact calculation.

What proof do I need to use ADU income?

• Expect to provide permits or a certificate of occupancy, an appraisal rent analysis, signed leases if occupied, bank statements showing rent, and tax returns with Schedule E when available.

Are short-term rentals allowed in Santa Barbara ADUs?

• Many areas of the City do not permit unhosted short stays under 30 days, and the City actively enforces STR rules. Illegal STR income is unlikely to be counted by a lender.

Can I use projected rent from an ADU I plan to build?

• Usually no. FHA’s 203(k) is an exception that may allow 50 percent of projected rent with strict documentation. Most conventional loans want income that is already being received.

Do I need landlord experience to use ADU income?

• Some programs, including Freddie Mac, require prior landlord experience or completion of landlord education when using ADU income. Your lender will outline what is required for your file.