The Quick Read: A hard money lender sizes the loan on the property and the plan, so ADU rent mostly serves as proof that the exit works, and it only counts when the unit is permitted, finaled, and backed by a lease, proof of payment, or an appraiser’s market-rent opinion. An accessory dwelling unit (ADU) is a second, smaller home on the same lot as the main house. Lenders count its rent only when they can verify the unit is legal.
- Permit and final sign-off come first. Without them, the ADU is usually left out of both value and rent.
- A signed lease helps, but the appraiser’s rent schedule still carries weight.
- A vacant or new unit relies on the appraiser’s market-rent opinion, not your target number.
- Build the file in order: legal status, appraisal, rent evidence, then the exit.
- Leverage, terms, and eligibility vary by lender, property, and experience, and nothing here is a commitment to lend.
Why Does the Permit Come First?
The permit decides whether the ADU is an asset or a problem. A permitted, finaled unit can add value and rent to the file. An unpermitted unit usually adds neither, because the appraiser flags it and the lender leaves it out.
What this loan actually costs to carry.
Hard money is sized against the project and priced by time. Enter the deal and see how much the program will lend, the cash required at closing, the carry while you hold it, and what is left at the exit.
Leverage tiers on the current program: 85% with fewer than 2, 90% with 2 or more, 93% with 5 or more completed projects — every tier capped at 75% of after-repair value. Loan amounts up to $5,000,000, larger by exception; terms of 6 to 18 months, interest-only, no prepayment penalty. The rehab portion funds in draws against completed work, not at closing.
Program parameters shown update from Lendmire’s centralized guideline source. Rate, points, and months are editable assumptions, not quoted terms.
Cost cap sets the loan · positive spread
Illustrative estimate only — not a quote, Loan Estimate, approval, or commitment to lend. Rate, points, and months are editable assumptions. Hard money is business-purpose financing for real estate investors, not a consumer mortgage. Leverage on the current program tops out at 93% of project cost for investors with a documented track record, capped at 75% of after-repair value, with rehab funding up to 100% of the documented budget released in draws; actual terms vary by lender, borrower experience, property, and exit. Lendmire is a mortgage broker, not a lender.
Lenders are conservative here for a simple reason. If a loan goes bad, the lender may have to own and operate the property. An illegal second unit is a liability in that scenario, not a source of income.
Hard money underwriting is asset-based. Across the lenders Lendmire works with, the loan is sized on the property, the plan, and the exit. Your personal income is not the driver. Most programs in the network want a credit score of at least 620, with added conditions below 660, though this varies by lender, property, and experience.
Rent evidence shows up in two places. The first is the after-repair value appraisal. The second is the takeout, which is usually a refinance into long-term rental financing once the property is stabilized. The permit is what makes the ADU count at both points.
Here is how permit status changes what you can document:
| Permit status | What rent can be documented | Typical lender reaction |
|---|---|---|
| Finaled with sign-off | Lease, receipts, appraiser rent | ADU can count |
| Open, not yet finaled | Appraiser target rent only | Rent often held back |
| No permit | Little that a lender will accept | Usually excluded |
| Legal nonconforming | Depends on local rules | Needs lender review |
Legal nonconforming deserves its own note. It means the unit was legal when built but no longer meets current rules. Some lenders accept it, and others treat it like an unpermitted unit. Ask early.
Key Terms Defined
Rent schedule: An appraiser’s opinion of what a unit would rent for in the open market, supported by comparable rentals. On appraisal forms this is often called Form 1007.
Rent roll: A simple table listing each rentable unit, its tenant, its lease dates, and its monthly rent.
Final inspection sign-off: The local building department’s approval that the work was completed to code. Some places issue a certificate of occupancy instead.
Market rent: What a unit would likely rent for today based on comparable rentals, whether or not anyone lives there.
DSCR: The debt service coverage ratio, which compares a property’s rent to its monthly principal, interest, taxes, insurance, and any association dues.
Loan-to-cost: The loan amount as a share of total project cost, which is how many hard money programs size rehab and construction loans.
What Counts as Proof That the ADU Can Be Rented?
Think of the file as a ladder with four rungs. The lender climbs as far as the facts allow.
| Situation | Primary document | Backup document | What the lender checks |
|---|---|---|---|
| Leased and paid | Signed lease | Bank deposits, receipts | Rent is real and ongoing |
| Month-to-month | Expired lease | Payment receipts | Tenant is still paying |
| Vacant, finished | Appraiser rent opinion | Listing and comparable data | Rent is supportable |
| Unfinished or new | Appraiser projected rent | Plans and budget | Unit will be rentable |
A lease is evidence, not a verdict. The appraiser’s rent opinion still matters even when a tenant is in place. Many programs use the lower of the lease rent and the appraiser’s figure, though that varies by lender.
Bank deposits, a ledger, and receipts all help. Cash rent with no trail is the weakest version of this, and lenders will question it.
A good ADU lease names the unit, the dates, the monthly rent, and the deposit. It should also match the permit paperwork. If the permit says one bedroom and the lease says two, expect questions.
How to Document ADU Rent for a Hard Money Loan, Step by Step
Order matters more than speed here. Each step builds on the one before it.
Step 1: Establish legal status. Gather the permit, the final inspection sign-off or certificate of occupancy, and the approved plans. Documents are named differently by jurisdiction, so use whatever your city or county calls them. For an older ADU, confirm its status with the local building department before you build a loan plan around it.
Step 2: Check the use restrictions. Zoning, rental registration, association rules, and deed restrictions can limit whether a second unit may be rented separately. A separate address, meter, entrance, or parking space also helps show that the unit stands on its own.
Step 3: Sequence the loan. For a build or conversion, the permit has to exist before work and draws begin. Draws are reimbursements against inspected work, and they follow the budget and schedule of values. Programs fund up to 100% of the rehab budget in draws against completed work, subject to lender guidelines. That figure applies to the rehab budget only, never to the purchase price.
Step 4: Prepare the appraisal. Tell the appraiser the ADU exists and that it is a rental. Confirm that square footage, bedrooms, and the kitchen match the permit documents.
Step 5: Assemble the rent evidence. Use the ladder above. Add a rent roll that separates the main house from the ADU. Add a short cover memo that explains the unit, its status, and the rent source.
Step 6: Line up the exit. Keep the lease, receipts, and appraisal in one folder. The same record often supports the later refinance into long-term rental financing.
How Should the Appraisal Report ADU Rent?
The appraiser, not the borrower, supplies the number for any rent that has not been earned yet. This surprises many investors. Your target rent is a starting point for conversation, not a figure the lender will adopt.
The appraisal forms are worth knowing by name. Form 1007 is the single-family comparable rent schedule. Form 1025 is the small residential income property report, and it builds a rent analysis into the appraisal. Hard money and DSCR files borrow these forms but set their own rules for how the numbers are used.
For contrast, agency guidance shows how careful appraisers are about ADU rent. Fannie Mae’s appraiser update says the ADU’s market rent goes on Form 1007 under one appraisal data standard, with a statement that the rent applies only to the ADU. Under the newer standard, the rent goes in the rental section of the main appraisal report. The same update says appraisers may substitute other rentals when ADU comparables are scarce, and that individual-unit rents from multi-unit properties often fit ADU function better.
That matters when your area has few ADUs. A legal, rented unit can still struggle if the appraiser cannot find supporting comparables. Fannie Mae’s Selling Guide requires Form 1007 for a one-unit investment property only when rental income is used to qualify. Your file may simply ask for “the rent schedule” without naming a form number, since form numbers are being phased out in the newer report.
Agency guidance goes further on one point that applies in spirit everywhere: the ADU should be legally rentable before its rent is reported. Agency programs are built for owner-occupied homes and run on their own limits, and none of those limits apply to hard money or DSCR files.
A Worked Example: Tidy File Versus Messy File
Picture an investor who buys a single-family home with a permitted detached ADU. The plan is to renovate the main house, lease the ADU, and refinance into long-term financing. Say the lender sizes the rehab as a fix-and-flip style loan, where leverage on most programs runs 85% to 93% of project cost depending on completed projects, always capped at 75% of after-repair value. These figures vary by lender, property, and experience.
Here is the tidy file:
- The permit and final sign-off are in the folder, with plans.
- The appraisal lists the ADU separately with its own rent comparables.
- A signed lease shows the unit, dates, rent, and deposit.
- Bank deposits match the lease rent each month.
- The rent roll lists the main house and the ADU on separate lines.
- A cover memo explains who the tenant is and when the lease began.
Now the messy file:
- The permit exists, but the final sign-off is missing.
- The lease started before the final inspection.
- Rent was paid in cash with no deposit record.
- The tenant is a relative, and no market comparison is in the file.
- The appraisal lumps the ADU into the main house.
The messy file is not necessarily dead. But the lender now has questions about legal status, rent source, and value. Each question can cost time, narrow leverage, or move the ADU out of the rent calculation entirely.
Here is a simple rent roll layout you can adapt. Fill it with your own facts.
| Unit | Tenant | Lease start | Lease end | Monthly rent | Proof of payment |
|---|---|---|---|---|---|
| Main house | name or vacant | date | date | amount | deposits or receipts |
| ADU | name or vacant | date | date | amount | deposits or receipts |
Add one short paragraph beneath it. State the permit number, the final sign-off date, the rent source, and anything unusual about the tenancy. A cover memo that answers questions before they are asked is cheap and effective.
What if the ADU Is Vacant, New, or Still Being Finished?
A vacant unit has no rent history, so the appraiser’s market-rent opinion carries the file. Support it with listing data, comparable rentals, and photos of the finished space. The lender wants to see that the unit will be rentable when work wraps up.
A rehab ADU is a little different. Rent is a projection, and the lender will treat it that way. The permit should be open and active, the budget should include the ADU work, and the schedule should show when the unit is expected to be finished. Do not sign a lease for a unit that is not yet rentable, because a lease for a unit without a final sign-off can create more questions than it answers.
Sequencing matters when the permit is still open. If rent is collected before the final inspection, a lender may read that as rent from an unpermitted unit. A cleaner approach is to line up the dates so that the final sign-off comes first, then the lease start, then the first rent payment. The file then shows a legal unit and a clean rent history from day one.
For a stabilized unit, the file leans on actual rent. For a new unit, it leans on the appraiser’s opinion. For both, the permit anchors the file.
Special Cases That Change the Documentation
Month-to-month tenants. Provide the expired lease and a run of payment receipts. The lender wants to see that the tenant is still there and still paying.
Family tenants. A relative paying rent is not disqualifying, but lenders will want proof that the rent is real and in line with the market. Keep the deposits clean and compare the rent to the appraiser’s figure.
Cash rent. A cash-only trail is hard to verify. If your tenant pays in cash, deposit it promptly and keep a dated ledger plus receipts. Better still, switch to a traceable payment method.
Rent above or below the appraisal. When the lease rent is higher than the appraiser’s opinion, expect the lender to use the lower figure or ask why. When it is lower, the lender may use the lease or the appraisal depending on the program. Either way, explain the gap in the cover memo.
Short-term rental ADUs. Form 1007 reports monthly long-term rent only. A short-term ADU needs separate documentation, and many programs treat it as the strictest category. In the network, short-term rental purchases typically run up to 75% LTV with a 640 or higher score and about 12 months of hosting history, subject to lender guidelines. Refinances and cash-out run lower. Long-term rent is usually the easier case to support.
Unpermitted but convertible. If the unit could be legalized, find out what that would take before you plan around its rent. Legalization can be a path forward, but until it is done, treat the unit as not counting.
What Gets ADU Rent Excluded?
Most exclusions trace back to a short list of problems:
- The ADU is unpermitted or the final sign-off is missing.
- The unit is nonconforming, restricted from separate rental, or owner-occupied.
- The appraisal does not support the ADU or its rent.
- The lease and payment trail do not match.
- The documents describe a different unit than the one built.
A few misconceptions keep tripping investors up. Good workmanship does not make an unpermitted unit count, because lenders and appraisers look at legal status. A lease alone does not prove rent, because the appraiser’s schedule still matters. The permit alone is not enough either, because the unit still needs a supported appraisal and complete rent records.
There is also a value gap to plan for. ADUs often appraise for less than they cost to build. Counting on the appraisal to return every dollar of construction can trap equity, so size the project with room to spare.
How Does This Documentation Support Your Exit?
Hard money is short-term financing, with terms commonly running 6 to 18 months, interest-only, with no prepayment penalty on the program. It is not meant to be held. The plan is to finish the work and then refinance. Many investors do that by moving into long-term DSCR investor loans once the property is stabilized, and Lendmire arranges that path through its lender network.
At the takeout, the new appraisal’s rent schedule and your lease usually set the rent used for lender review. An ADU that was not counted can mean a lower qualifying ratio and less cash out. That can leave the hard money loan hard to refinance. Lendmire’s piece Hard Money Exit Loans: How the Payoff Is Sized on the Appraisal and the Rent walks through that math.
Keep the DSCR picture honest. DSCR compares rent to the full monthly payment of principal, interest, taxes, insurance, and dues. Clearing 1.00 does not mean positive cash flow, because repairs, vacancy, management, utilities, and capital costs sit outside the calculation. Where coverage lands also affects leverage, which is why the permit and rent record matter. 1.00 is where many select programs start, and a separate select-lender path takes coverage below 1.00 with leverage and terms adjusted. The complete DSCR loans guide explains how the ratio works from start to finish.
Taxes and insurance can also shift once the ADU is finished, which changes the monthly obligation in the ratio. Tax treatment varies, so consult a qualified professional.
If funds are the sticking point, read Lendmire’s guide Hard Money Loan Denied Because The Borrower Cannot Document Funds To Close. Rent documentation will not fix a funds problem.
Pre-Submission Checklist
Before you send the file, confirm each item:
- Permit and final sign-off or certificate of occupancy.
- Approved plans that match what was built.
- Zoning, rental registration, and association or deed checks.
- Insurance that reflects the real structure and its rental use.
- A separate address, meter, or entrance, where applicable.
- A signed lease with term, rent, and deposit.
- Bank deposits or receipts that match the lease.
- A rent roll that separates the main house from the ADU.
- Photos of the finished unit.
- A short cover memo explaining the unit and any unusual facts.
What should you ask the lender up front? Ask whether an ADU is eligible on your property type, how the lender treats projected rent, whether the lower of lease and appraisal is used, and what the lender wants for a unit that is not yet finaled. Eligibility varies by lender and property, and loans up to $5,000,000 are available on the program for 1-4 unit non-owner-occupied residential property, with larger amounts by exception.
Frequently Asked Questions
Does ADU rent count if the unit is unpermitted?
Usually not. Appraisers tend to flag an unpermitted ADU, and the lender then leaves it out of both value and rent. If the unit could be legalized, finding out what that takes is the better first move.
Can I use projected rent for an ADU that is not finished?
Yes, but the number comes from the appraiser, not from you. Support it with comparable rentals and a budget and schedule showing when the unit will be ready. Lenders review projected rent more cautiously than rent already being paid.
Is a signed lease enough to prove ADU rent?
No. A lease needs proof of payment behind it, and the appraiser’s rent schedule still matters.
What if my tenant pays cash or is a relative?
Both can work if the trail is clean. Deposit cash promptly, keep a dated ledger, and compare the rent to market. The lender will question anything that looks informal.
Will documenting the ADU now help my later refinance?
It often does. The lease, receipts, and appraisal you build now are the same records a long-term rental lender will want. A clean record can support the rent used for lender review and, depending on the program, leverage.
If You Are Ready to Put the File Together
If you are buying, rehabbing or refinancing an investment property on a short timeline and want to see how the numbers work, Lendmire can help you compare hard money options based on the project, the exit plan, leverage, and your goals. Lendmire is a broker arranging financing through select lenders in its wholesale network across 41 markets, including Washington, D.C., and every file is reviewed individually.
About Lendmire
As a DSCR and non-QM mortgage broker, Lendmire — NMLS# 2371349 — connects investors with wholesale lending channels across 41 markets, including Washington, D.C. The property’s rental income, not the borrower’s tax returns, is central to lender review, which works for self-employed operators and portfolios beyond four financed properties. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Appraiser Update (ADU)
2. Fannie Mae Selling Guide B4-1.2-01
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How to Prepare Leases and a Rent Roll for a 2-4 Unit DSCR Loan · DSCR Cash-Out Now vs Waiting for Hard Money and Rehab Card Payoff · How to Refinance Out of Hard Money With a DSCR Loan Before the Payoff
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.