A backyard cottage moves two numbers, and they do not move together. One is what the house costs you to live in each month. The other is the income a lender will count when it sizes your loan. In the example below the first falls by $1,190 a month and the second does not move at all.
What counts as an ADU?
An accessory dwelling unit, or ADU, is a second smaller home on a lot that already has a house: a converted garage, a basement apartment with its own entrance, a cottage in the back yard. It has its own kitchen and bathroom, and somebody can live in it without walking through your house.
The house stays a one-unit property. That matters for the loan, because a duplex is financed on different terms than a house with a cottage behind it. Fannie Mae’s rental income rules for the property you are buying, dated September 2, 2026, allow “one-unit Accessory Dwelling Unit (ADU)” with “a one-unit primary residence only.”
Will a lender count the ADU’s rent?
Sometimes, within three limits that the same Fannie Mae page states plainly:
- “Rental income is only allowed from one existing ADU.” A second unit on the lot earns you nothing on the application, and neither does one you intend to build.
- “Purchase or limited cash-out refinance transactions only.” A limited cash-out refinance is one where you take out little or no cash beyond the costs of the new loan. A cash-out refinance is out.
- “The qualifying rental income amount from the ADU is limited to 30% of the total qualifying income.”
The page does not define total qualifying income for that last limit, so ask your lender how it applies the cap before you lean on it.
Those limits sit on top of the ordinary rental income arithmetic, which does not change for an ADU. On a purchase, the lender takes 75% of the gross monthly rent, then subtracts the property’s PITIA, meaning the monthly principal, interest, taxes, insurance and any association dues. What is left is adjusted net rental income. Using rental income to qualify for a mortgage works through that 75% step in detail.
Two more conditions decide what a positive figure is worth. With twelve months or more of rental management experience you can use it in full. With less, it can only offset the property’s PITIA. A negative figure goes into your debt-to-income ratio either way. To support the rent, the lender needs Form 1007 or Form 1025, the appraiser’s own view of what the unit should rent for, plus a signed lease if one comes with the house.
What does the ADU do to your own cost of living there?
This is the number a lender does not look at, and the one you pay.
This example is a $400,000 house with the ADU already built. The down payment is 10%, or $40,000, on a 30-year loan at an assumed 6.75%. Property taxes of $4,800 and insurance of $2,240 a year are the calculator’s own estimates for that price, 1.2% and 0.56%. Mortgage insurance runs at the calculator’s placeholder of 0.84% of the loan a year, because the down payment is under 20%. The ADU is let at $1,400, with 5% of the rent set aside for the weeks between tenants, 10% for repairs and big repairs, and no property manager.
| Each month | |
|---|---|
| ADU rent | $1,400 |
| Weeks between tenants (5% of rent) | −$70 |
| Property tax and insurance | −$587 |
| Repairs and big repairs (10% of rent) | −$140 |
| Mortgage, principal and interest | −$2,335 |
| Mortgage insurance | −$252 |
| Your cost to live there each month | −$1,984 |
These are example figures, not a forecast for any market.
With the unit empty, or with no unit at all, the same house costs $3,174 a month. The ADU is worth $1,190 of that, which is less than its $1,400 rent because the vacancy and repair set-asides come out first. Buying it takes $52,000 of cash: the $40,000 down payment and $12,000 of closing costs at 3%.
What does the lender add to your income?
Nothing, on these numbers, and that surprises people.
Run the Fannie Mae steps on this house. Gross rent is $1,400, and 75% of that is $1,050. The property’s PITIA is $3,174, the same figure as the cost of living there with the unit empty, because at that point the house is nothing but principal, interest, taxes, insurance and mortgage insurance. Subtract: $1,050 minus $3,174 is negative $2,124.
So the ADU does not add income here. A negative adjusted net rental income goes into the debt-to-income ratio, which means the rent makes the loan harder to get rather than easier, and the 30% cap never comes near binding. The rent is still real money. It just arrives after the loan is approved, not before.
The gap closes when the rent is large against the payment. A bigger down payment shrinks the PITIA, which is one reason the arithmetic looks different on a house-hacked small building, where as many as three rents can meet one payment. Is house hacking worth it runs that version twice, once as a home and once as a rental.
What changes the answer?
The down payment moves it more than the rent does.
| Your cost each month | |
|---|---|
| No ADU, or an empty one | $3,174 |
| The example, ADU let at $1,400 | $1,984 |
| ADU let at $1,100 | $2,239 |
| ADU let at $1,700 | $1,729 |
| 20% down instead of 10% | $1,472 |
| Rate of 7.5% instead of 6.75% | $2,166 |
| A property manager at 8% of rent | $2,096 |
Going from 10% to 20% down saves $512 a month, $252 of it by ending the mortgage insurance, and costs $40,000 more at closing. What PMI costs on an investment property covers that premium and why the 0.84% is only a placeholder until a lender quotes you.
How do you run your own numbers?
Open the rental calculator, put the house price in, and type the ADU’s rent into Monthly rent. Set Property management to zero if you will handle it yourself, leave the Vacancy rate at 5% or raise it if units like yours sit, and replace the tax and insurance estimates with the county’s bill and a real quote as soon as you have them. The cash flow line will read as a negative number, because you live in the other unit and pay the rest of the payment yourself. That figure is your cost to live there, and it is the one to compare against renting.
Then ask a lender the second question separately: how much of the $1,400 it will count, and what it needs to see. The two answers are not the same, and a seller’s listing that promises the unit “pays the mortgage” is talking about the first one. For the version with real units and a rent roll, how to analyze a multifamily property is the next step. The ADU’s rent is also income at tax time, and how much of the house counts as rental property is a question for a tax professional, not for a calculator.