Can You Count ADU Rent on a DSCR Loan?

Rent from an accessory dwelling unit can count toward DSCR on our 1-4 unit investor program — but only when four specific conditions are all present at the same time, and only after the ADU itself has cleared a separate set of property requirements. If any one of the four fails, the ADU rent does not get discounted or haircut. It drops out of the calculation entirely.

That is the part people get wrong. A failed condition does not mean a reduced number. A casita producing $1,400 a month either contributes $1,400 to gross rent or contributes zero. Where the main house alone carries a 0.94 DSCR and the ADU is what pushes it over 1.00, that is the difference between a loan and a decline — and it usually surfaces late, after the appraisal is back and paid for.

This page lays out both sets of requirements as the program states them, explains what happens when one fails, and gives you a way to check your property before you order anything.

The two gates

Two hurdles, easy to confuse because they live in different sections of the guideline. Gate one is the ADU itself — whether the structure is something the program recognizes as an accessory dwelling unit at all. Gate two is the rental income — four additional conditions that have to be met before the rent counts toward DSCR.

You can clear gate one and fail gate two. That is the common outcome: a real, well-built, appraiser-acknowledged ADU whose rent still does not count because it shares a water meter with the main house, or because the tenant is the same person renting the front house.

Gate one — what qualifies as an ADU

The program describes an ADU as an additional living area independent of the primary dwelling that may have been added to, created within, or detached from a primary one-unit dwelling — a converted garage, a basement or attic conversion, an attached addition, or a detached backyard cottage. Then come the limits.

One ADU per parcel: a lot with a converted garage and a backyard cottage is not a one-unit-with-ADU property under this program, whatever the municipality permits. And subordinate in size: a 1,300 square foot "guest house" behind an 1,100 square foot main house does not fit, no matter what the permit card says.

The separate-features test

The ADU must have all of the following as separate features from the primary dwelling:

The kitchen is where garage conversions most often fail. The guideline enumerates four components — cabinets, a countertop, a sink with running water, and a stove. A hot plate is not a stove. A bar sink with no cabinetry and no counter run is not a kitchen. If the conversion was done to house a family member rather than a tenant, that is usually the corner that got cut, and it is the corner an appraiser will photograph. Note too that "bathing area" and "bathroom facilities" are separate line items: a toilet and sink with no shower or tub does not satisfy both.

What the appraiser has to establish

The program requires that the appraiser confirm the subject property is a one-unit property with an ADU, and that the appraisal contain comparables with ADUs in the subject property's market area. That is a real constraint where ADUs are still uncommon: if the appraiser cannot find comparable sales of one-unit properties with ADUs nearby, the report cannot be built the way the program needs it built.

There is some latitude in how to show it. The appraisal report must demonstrate that the improvements are acceptable for the market; an aged settled sale will qualify as a comparable, and an active listing or under-contract sale will qualify as a supplemental exhibit to show marketability. Raise that with your appraiser early rather than letting the report come back short.

Gate two — the four conditions for counting ADU rent

All four have to be present. There is no partial credit.

1. Legal unit, recognized by the municipality. Not "grandfathered in the neighborhood," not "everyone on the street has one." Whether your structure meets that standard is a question for your city or county building department and your attorney — a municipal and legal determination, not a lending one, and not one we make for you.

2. Separate lease, not affiliated with the tenant in the main unit. Two documents, two tenants, no relationship between them. If the family renting the main house also has use of the casita under one lease, there is one rental stream, not two — and renting the ADU to that tenant's adult son on a side agreement is the same problem in a different shape.

3. Separate entrance — ingress and egress. The tenant must be able to get in and out without passing through the primary dwelling. A basement apartment reachable only through the main house's stairwell does not qualify, even if it is otherwise complete. This is also listed under gate one, so it is tested twice.

4. Separate meter/utility. This surprises people most and costs the most to fix. Sub-metering, a written utility-sharing arrangement, or a flat utility add-on baked into the rent are not the same thing as a separate meter. Running a second electric service to a detached casita is permitted, inspected, scheduled work — not something you complete between appraisal and closing.

The asterisk at the end of the list is not decorative: all of it must be confirmed and validated by the appraiser. Your photographs, your contractor's letter and your utility bills are supporting material. The appraisal is the document that carries it.

What each condition costs you if it fails

The right-hand column is deliberately monotonous. The consequence is identical in every row: the rent does not count, and DSCR is recalculated on the primary dwelling alone.

Where the rent number comes from once the ADU counts

Clearing both gates gets the ADU into the calculation. It does not tell you what number goes in.

DSCR is gross rents divided by the PITIA of the subject property, using the note rate, taxes from the title policy or current tax bill, the premium from the approved insurance certificate, and any association fee, each monthly. Interest-only loans may use the ITIA payment instead. Gross rent depends on the transaction:

• Purchase: obtain Appraisal Form 1007 and use 100% of the gross market rent in the DSCR calculation.
• Refinance: obtain both a current lease agreement and Appraisal Form 1007. Gross rent used must come from the lesser of the lease agreement or the 1007 — with one exception.

That exception is the 10% rule: when the lease is higher than the gross market rent on the appraisal, the amount used for qualifying cannot exceed 10% over market rent, and if actual rent is above market but no more than 10% over, the lease amount can be used. The arithmetic is covered in full in [when your lease rent is above market rent on a DSCR loan](/blog/lease-rent-above-market-rent-dscr-loan-10-percent-cap).

Two details specific to ADU files. Market rent estimates must be based on an annual lease for residential purposes, on the applicable Fannie Mae form — FNMA 1007 for a 1-family, FNMA 1025 plus form 216 for a 2-4 family. A property with a qualifying ADU is a one-unit property with an ADU, not a two-unit property, so the 1007 is the operative form. And short term or specialized use rental rates are not acceptable for use as market rent: if the only rent evidence for your casita is a nightly rate, it is not market rent here.

The lease on the ADU has to stand on its own

The program's general lease requirements apply to the ADU lease the same as any other. Leases must be fully executed by both an eligible tenant and the borrower or guarantor as landlord, be in the name of the borrower/guarantor or their verified property manager, carry a rate and terms consistent with those prevailing in the local market, be on a form customary to the area and compliant with applicable legal requirements including required disclosures, and cover 100% of the square footage of the applicable residential unit. All tenants must be natural persons; exceptions for other entity types may be considered case by case. No leases with a term of three years or more, and rent-to-own and contracts for deed are ineligible.

An eligible tenant is any party other than a borrower or guarantor, an affiliate, an officer, director, executive employee or manager of the borrowing entity, and any family member — spouse, siblings, ancestors, lineal descendants — of any of those. That exclusion deserves a flag: ADUs are frequently built to house a parent or an adult child. If that is who lives in yours, the unit is not producing eligible rental income for this program, however real the money is.

How the ADU changes the rest of the file

Adding ADU rent raises gross rent, which raises DSCR, which moves several thresholds at once:

• Reserves. DSCR at or above 1.0 requires 3 months PITIA on the subject property; below 1.0 requires 6 months. Getting the ADU rent to count can halve your reserve requirement.
• DSCR below 1.0 is not permitted for inexperienced investors, vacant properties, or portfolio loans. If excluded ADU rent drops you under 1.0, an inexperienced investor's file does not reprice — it becomes ineligible.
• Minimum DSCR of 1.25x on loan amounts under $150,000.
• Minimum FICO is 660 for all guarantors. With one individual guarantor the middle score sets rate and LTV; with multiple guarantors, rate and LTV follow the lowest middle score, and all others must still meet 660.
• Vacancy. Unoccupied or unleased long-term rental properties take a 5% LTV reduction from the eligibility-grid maximum on any refinance. That reduction does not apply to purchases.

Maximum LTV on a purchase or rate/term refinance at a $1,500,000 loan amount, DSCR at or above 1.0:

The 660 row is a one-unit row. LTV reductions apply for specific loan characteristics, including vacancy, short-term rentals and non-warrantable condos.

If you rent the ADU short-term

Short-term rental income runs on a different track. Short-term rentals are properties where the rental term is less than 12 months, relatively variable in duration, and may not be subject to a traditional lease agreement. Qualifying on short-term rental income caps LTV at 60%, requires a minimum DSCR of 1.25, adds 6 months of PITIA reserves, and applies an 80% factor to monthly gross rent to account for the costs of operating a short-term rental. Inexperienced investors are not permitted to qualify via short-term rental income, all loans must be originated in accordance with federal, state and local regulations pertaining to short-term rentals, and New York City short-term rentals are not permitted.

There is a stated test for 2-4 unit properties: the property is deemed a short-term rental if 50% or more of the units are used as short-term rentals. The guideline does not state how that applies to a one-unit property with an ADU where only the ADU is rented nightly, nor does it reconcile that arrangement with condition two, which requires a separate lease in place — short-term rentals may not be subject to a traditional lease at all. Rather than guess at rules that are not written, bring that configuration to us before you order anything.

Permitting, and the commercial-side cousin

Permitting sits at the center of condition one, and it is the one we cannot resolve for you. Whether a garage conversion is a legal unit recognized by your municipality is answered by your city or county building department and your attorney. We do not interpret zoning ordinances, opine on whether a retroactive permit is obtainable, or estimate what legalization would cost or take.

What we can tell you is what the program does with the answer. Eligible property types include properties that are legal or legal-non-conforming use, and properties which are not in compliance with local zoning regulations are ineligible. On the appraisal side, the appraisal must ensure that any and all additions or conversions have been completed according to code, or the lender must provide a recent certificate of occupancy validating that code requirements have been met — the practical hinge for most conversions.

What the guideline does not address

Being explicit about silence is more useful than filling it in:

• No minimum square footage for the ADU itself. The program sets minimums for the property — 700 sq ft for a one-unit property, 500 for a condominium, 400 per unit for 2-4 units — and requires the ADU be subordinate in size to the primary dwelling. It publishes no ADU floor.
• No separate rent-schedule form is named for the ADU. How the ADU rent is presented within the 1007 is not spelled out.
• No stated ratio between ADU rent and main-house rent. "Subordinate in size" is a size test, not an income test.
• No published timeline or cost for legalizing a unit, separating a meter, or obtaining a certificate of occupancy. Those are municipal and contractor questions.

How to check your property before you spend money

Each step is cheap until the last one.

1. Count the ADUs on the parcel. More than one, and the property does not fit the one-unit-with-ADU definition.

2. Compare square footage. The ADU must be subordinate in size to the primary dwelling. Measure, do not estimate.

3. Check the five separate features. Own entrance. Kitchen with cabinets, countertop, sink with running water and stove. Sleeping area. Bathing area. Bathroom facilities. Missing one is a gate-one failure.

4. Find the meter. One or two? If one, you have a construction project ahead of you, and it should start before the appraisal.

5. Pull the permit record. Ask the building department whether the unit is on record as a legal dwelling unit and whether a certificate of occupancy exists. If the answer is unclear, that is for your attorney, not for us.

6. Look at your leases. One or two? Is the ADU tenant unrelated to the main-house tenant, and is neither a family member of a borrower or guarantor?

7. Only then order the appraisal, telling the appraiser up front that the property is a one-unit property with an ADU and that the report needs comparables with ADUs in the market area.

If steps 1 through 6 come back clean, the ADU rent has a real path into your DSCR. If any do not, you know the number to underwrite yourself on: the main house alone.

What this page does not do

This is not an approval, a pre-qualification, a quote, or a commitment to lend. Nothing here reserves terms or pricing.

It does not tell you whether your specific ADU is a legal unit recognized by your municipality. That determination belongs to your local building or planning department; the legal consequences of an unpermitted unit belong to your attorney. We do not interpret zoning ordinances, advise on retroactive permitting, or estimate legalization cost or timing.

It does not cover the full DSCR program. Eligibility grids, LTV limits by loan size, prepayment penalties by state, entity and guarantor structure, foreign national requirements, portfolio and blanket loans, condo project requirements, geographic restrictions, insurance and appraisal review procedures all live outside this page. It does not address the tax treatment of ADU income, the basis consequences of a conversion, or the insurance implications of adding a separate dwelling unit — those are for your accountant and your insurance agent.

And it does not resolve how a one-unit property with a short-term-rented ADU is classified. The guideline does not state that rule, and we will not invent one on a public page. Bring that scenario to us directly.

Guideline DSCR V28 · Reviewed August 31, 2026

Published September 1, 2026 · Updated September 1, 2026