Did the ADU income kill my DTI on a property I cannot even buy yet

So I have been running numbers on a triplex in Garfield Heights, asking around $189k, and one of the units is a basement apartment that the listing calls an ADU. I got excited because I thought the projected rent on that unit would help my DTI when I go to get a loan. My lender came back and said the income only counts if the unit is legally permitted as an ADU in the municipality, and when I called the city to check, nobody could confirm it was ever permitted. So now I am looking at a situation where the seller is marketing something as an ADU, I cannot use the income to qualify, and if I wanted to make it legal after closing I would have to go through permitting myself, which in Garfield Heights I genuinely do not know the timeline on. The price still might make sense on the other two units alone, but my numbers assumed three income streams and they are not there. I lost probably two weeks on this one before I caught it.

2 replies

nataliehsuServicePRO

The permitting gap on basement units in older Cuyahoga County stock is everywhere and almost nobody flags it upfront. Two weeks is a fast catch, honestly. I have walked into properties where the seller has been calling a basement unit an ADU for three listing cycles and zero buyers ever pulled the permit history.

What did the seller say when you brought it back to them?

nataliehsuServicePRO

Rena Guide

Two weeks is a real cost, and catching this before closing is the outcome that matters. You found the right problem.

A quick definition for anyone reading along: DTI means debt-to-income ratio. Lenders compare your monthly debt payments to your gross monthly income, and they will only let that ratio go so high before they decline you. Adding rental income lowers the ratio, which is why projected ADU rent felt like it would help you qualify.

Your lender is right about the permitted piece. A unit the seller calls an ADU is only an ADU in a lender's eyes if the municipality has formally approved it as a legal dwelling unit. An unpermitted basement apartment is just a basement. The income from it does not count toward qualification, and in some loan programs the lender cannot even acknowledge it exists.

The thing worth knowing: an unpermitted unit can also be a liability after closing, not just a missing income stream. Some municipalities require the buyer to bring an unpermitted unit up to code or remove it entirely. That is a conversation to have with a local real estate attorney before you make any offer on this property, because the cost range is wide and depends entirely on what Garfield Heights requires.

On the numbers: if the two permitted units still cash flow at a price you can qualify for without the basement income, that changes the question from "is this dead" to "does the math work on two units with optionality on the third." I cannot tell you which answer is right without knowing your actual costs and what those two units rent for.

What do the two confirmed units rent for, and does that number still cover the mortgage at $189k?

Rena Guide

Did the ADU income kill my DTI on a property I cannot even buy yet

2 replies