The Quick Read: Usually, a lender gives no credit for ADU rent on a full cash-out refinance. Agency rules count that rent only on purchases and on limited cash-out (or no-cash-out) refinances, and only on a one-unit primary residence. Taking cash out to build or upgrade the ADU often moves the loan into the full cash-out category. In that case your other income has to carry the loan on its own.
What Counts as an ADU Here?
An accessory dwelling unit is a separate, habitable living unit on the same lot as your home. It can sit inside the house, attach to it (a unit over a garage), or stand alone in the backyard. HUD defines an ADU in its Handbook 4000.1 glossary as a habitable unit with separate ingress and egress that meets minimum living-unit requirements.
Cash-out refinance estimate
The starting figures are an example value with a balance and a cash request in proportion. Replace them with yours.
Editable benchmark: 7.18% as of November 5, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the agency cap on a one-unit principal residence, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a cash-out refinance quote; a cash-out loan is priced by the lender at lock. The cash available is the loan the program cap allows less the balances paid off, before closing costs, which are not included. The HELOC line is the program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. Licensed in sixteen states for consumer mortgages.
Two things matter for this article. The ADU has to be legal and permitted. And the home has to be your principal residence. Both rules show up again below.
Why Does the Loan Type Decide Everything?
The loan type is the first fork in every ADU file. Before anyone looks at the rent, the lender classifies the refinance as limited cash-out or full cash-out. That label decides whether the rent can count at all.
Fannie Mae’s UAD 3.6 policy supplement sets four conditions for ADU income. The property is a one-unit principal residence. The transaction is a purchase or a limited cash-out refinance. Income comes from only one ADU. And the ADU income used is capped at 30% of the income used to qualify. Full cash-out is not on that list. Freddie Mac’s rules in Guide section 5306.1 lay out ADU treatment for purchases and “no cash-out” refinances. They show no separate cash-out category, so read that section closely with your loan officer.
Limited Cash-Out vs. Full Cash-Out
A limited cash-out refinance is a rate-and-term-style loan. It pays off your existing first mortgage and the closing costs, plus a purchase-money second lien if you have one. Only incidental cash comes back. Under the program parameters, Fannie Mae caps that cash at the lesser of 2% of the new loan amount or $2,000. The rate-and-term lane reaches 95% LTV on a one-unit principal residence, with mortgage insurance above 80%. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
Go past that cash-back cap, or pay off liens that were not purchase-money, and the loan becomes a full cash-out refinance. A conventional full cash-out on a one-unit primary residence goes to 80% LTV. Two- to four-unit homes, second homes and investment property go to 75%. The first mortgage being paid off should be at least 12 months old, and you should have been on title for 6 months, with exceptions for delayed financing, inheritance and legal awards. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
| Factor | Limited cash-out | Full cash-out |
|---|---|---|
| Cash back to borrower | Small capped amount | Above the cap |
| Max LTV, 1-unit primary | 95% | 80% |
| ADU rent counts? | Yes, if conditions met | Generally no |
| Funds a renovation? | No | Yes |
A renovation budget almost always exceeds the cash-back cap. That is why a “renovation cash-out” and ADU rent credit rarely coexist. Lendmire’s cash-out refinance programs page covers the leverage and seasoning side in more detail. Program figures are subject to lender guidelines and full file review.
How a Lender Underwrites ADU Income, Step by Step
When ADU income is allowed, the deal works through a set sequence. Here is what the underwriting path looks like.
1. Classify the loan. The lender decides limited or full cash-out under the investor’s definition. This is the gate. If the loan is full cash-out, the rest of the ADU steps may never apply.
2. Check eligibility. One-unit principal residence. One ADU whose income is used. The ADU must be legal and permitted. The Freddie Mac ADU fact sheet bars rent from an illegal ADU.
3. Document the rent. Expect a signed lease or your most recent tax return, plus the appraiser’s market rent estimate. The lease-based method counts 75% of the rent, which leaves room for vacancy and upkeep.
4. Appraise the unit. The appraiser reports market rent specific to an ADU on a one-unit principal residence. If there are no ADU rental comparables, similar non-ADU rentals may be used with adjustments. The appraisal covers both the ADU’s value and its rent, so the two are not double-counted.
5. Apply the cap. ADU income used cannot exceed 30% of qualifying income. It supplements your income. It does not replace your salary.
6. Run the debt-to-income ratio. At Freddie Mac, the housing expense is figured without any rent offset. The net rent is then added to your stable monthly income. The ratio improves because income goes up, not because the payment shrinks.
7. Underwrite the file. Fannie Mae allows ADU income to be run through automated underwriting or manually. Your lender must also document that you can repay. The CFPB’s ability-to-repay explainer says lenders must consider and document income, assets, employment, credit history and monthly expenses. Rent that isn’t documented doesn’t count.
A Scenario Without Dollar Figures
Picture a homeowner whose income alone leaves the debt-to-income ratio a few points above the lender’s ceiling. The wholesale conventional programs start from a total ratio ceiling of 50% on an automated finding, while manually underwritten loans run at 36% or 45%, depending on the reserve and score factors. Add a documented ADU lease on a limited cash-out refinance, and the ratio can drop back under the line. The rent is counted at 75% and held under the 30% cap.
Now change one fact. The same homeowner wants cash for the ADU build, so the loan goes full cash-out. The rent drops out. The ratio goes back above the ceiling. The file now depends on the owner’s other income, a co-borrower, or a different structure. Same house, same ADU, different loan type, different answer.
Where the Rule Breaks
- Multiple ADUs. Only one ADU’s income can be counted at Fannie Mae. Fannie Mae’s older ADU page says properties with multiple ADUs are ineligible, which conflicts with the newer rule. Rely on the Selling Guide and the UAD supplement, and ask your lender which version it follows.
- Two- to four-unit homes. Different rules apply. Rent from the units you don’t occupy may be usable under each agency’s own multi-unit rules, and that is not ADU treatment.
- A new ADU with no rental history. A conventional lender’s treatment of a not-yet-built unit varies by program, so projected rent should be treated as unusable until a lender confirms otherwise. FHA’s 203(k) renovation program is described as allowing a reduced share of projected rent. Verify that in HUD’s Mortgagee Letter 2023-17 and Handbook 4000.1 before relying on it.
- FHA cash-out on a one-unit home. FHA reportedly bars ADU rent as effective income on these loans. Confirm it in the Handbook.
- Appraisal form. Fannie Mae’s expanded ADU eligibility is tied to the newer appraisal form, UAD 3.6. Not every lender or appraiser is on it, so availability varies.
- Manufactured-home ADUs. Freddie Mac’s rental income FAQ says rent from a manufactured-home ADU can qualify if the section 5306.1(g) requirements are met.
- Lender overlays. A lender can be stricter than the investor. Two lenders buying the same loan type can still treat the same ADU differently.
What About FHA Streamline and VA IRRRL?
Neither fits a renovation plan. The FHA Streamline (existing FHA loan: no appraisal, limited credit review, net tangible benefit) and the VA IRRRL (existing VA loan: no VA appraisal, net tangible benefit, a 0.5% funding fee unless exempt) are rate-reduction products. They are built to refinance an existing government loan with little documentation. Because both involve little or no income calculation, ADU rent has almost no place to enter the file. Neither is a renovation-cash tool.
Common Misconceptions
- “Projected ADU rent always counts.” It depends on the transaction, the program, the cap and the paperwork.
- “ADU rent counts on any refinance.” At Fannie Mae it is limited to purchases and limited cash-out refinances.
- “Rent counts at 100%.” The lease-based method counts 75%.
- “It can replace my salary.” The 30% cap says otherwise.
- “Fannie and Freddie treat ADUs the same.” Transaction types and borrower requirements differ. Older training material claimed Fannie Mae allowed ADU rent only on HomeReady, so earlier information may be stale.
- “An unpermitted ADU counts.” An illegal unit’s rent cannot be used at Freddie Mac.
What Can You Do if the Rent Can’t Count?
You have a few structures to weigh. Which one fits depends on your income, equity and timeline. Treat these as strategy options, not verified rules for every lender.
- Qualify without the rent. If your income covers the new loan on its own, the exclusion costs you nothing.
- Finish and rent the ADU first, then refinance. Once the unit is built, legal, appraised and leased, a limited cash-out refinance may be able to count documented rent. This works only if you can fund the build another way.
- Use a renovation product or a separate financing step. How a renovation product treats a new ADU’s income varies by product and lender, so get a lender’s answer before you count on any of it.
- Add a co-borrower. A second income can carry the ratio when rent can’t.
- Watch the ratio ceiling. If the file is tight even before the build, see Lendmire’s piece Top Cash-Out Refinance Providers With a Debt-to-Income Ratio Near the Lender Limit.
The best program for your situation depends on your income, equity, credit profile and whether the ADU exists. A broker that shops several wholesale lenders can match the scenario to the program that fits it, rather than forcing the file into one lender’s rules.
Key Terms Defined
- ADU (accessory dwelling unit): A separate, habitable living unit on the same lot as your primary home.
- Limited cash-out refinance: A refinance that pays off the first mortgage and costs, with only a small capped amount of cash back.
- Full cash-out refinance: A refinance that returns more cash than the cap, or pays off liens that weren’t purchase-money.
- Qualifying income: The income a lender counts when it calculates your debt-to-income ratio.
- Debt-to-income ratio: Your monthly debts divided by your monthly income.
- Overlay: A lender rule stricter than the investor’s guideline.
Documents to Gather
Start the file with the paperwork a lender will ask for on any ADU:
- Permits and proof the ADU is legal
- A signed lease, or tax returns with Schedule E if the unit already earns rent
- Proof of any landlord or property-management experience
- Your standard income, asset and mortgage statements
Rental income is taxable. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Frequently Asked Questions
Can I use ADU rent to qualify for a cash-out refinance?
Usually not on a full cash-out loan. Fannie Mae counts ADU rent only on purchases and limited cash-out refinances, and Freddie Mac’s rules cover purchases and no-cash-out refinances. FHA reportedly bars it on one-unit cash-out loans. Ask the lender how it classifies your loan before you count on the rent.
Does projected rent from an ADU I haven’t built yet count?
Generally it does not on a conventional loan, and no lender should treat it as a given. Income has to be documented, and the lender’s guideline decides what is allowed. FHA’s 203(k) program is described as allowing a reduced share of projected rent, which you should confirm against the Handbook.
How much of the ADU rent can a lender count?
On the lease-based method, 75% of the rent. The ADU income used is also capped at 30% of the income used to qualify at both agencies. Fannie Mae adds a limit for borrowers with under 12 months of property-management experience.
Does the ADU have to be permitted?
Yes. Freddie Mac’s fact sheet says rent from an illegal ADU cannot be used. Keep permits and proof of legal status in the file from the start.
Is there a way to get the rent counted if I want to renovate?
Possibly, by restructuring. One path is to finish and lease the ADU first, then pursue a limited cash-out refinance. Another is a separate renovation product. Either one depends on lender guidelines and a full file review, and nothing here is a commitment to lend.
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
2. Fannie Mae UAD 3.6 Policy (Selling Guide supplement)
3. Freddie Mac Guide section 5306.1
5. CFPB: What is the ability-to-repay rule
6. Fannie Mae’s older ADU page
7. HUD Mortgagee Letter 2023-17
8. Freddie Mac rental income FAQ
This article is part of Lendmire’s cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Best Cash-Out Refinance Program on a Condo · Cash-Out Refinance Requirements on a Rural Property · Best Cash-Out Refinance Program When the Lender Asks for Cash Reserves
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.