Long Island Banks Count Accessory Dwelling Unit Income in Mortgage Qualification

Written by:

Rudi Davis

Date:

01 Mar 2026

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Lenders across Long Island are now treating accessory dwelling units, including basement apartments and mother-daughter setups, as income-generating assets rather than liabilities. According to Perry Pappas, team leader of The Perry Pappas Team with Coldwell Banker American Homes, the shift in underwriting standards is changing how buyers qualify for mortgages and how sellers market their properties.

Banks have started to count projected rental income from accessory units toward a buyer’s mortgage qualification, Pappas explains. “They’re treating them as multifamily properties, looking at these homes that have an accessory apartment and giving qualifying income to that forecasted rent roll.” As a result, buyers can factor in future rental income when calculating their borrowing capacity, expanding their purchasing power in a market with tight inventory and rising prices. For properties with existing or easily convertible spaces, the underwriting shift affects valuation and marketability.

Buyers Modify Homes to Meet ADU Lending Requirements

The impact of this shift is most visible in how buyers approach negotiations. Pappas reports that buyers are now making offers contingent on installing kitchens or bringing in appliances specifically to meet lender requirements for completed accessory units. In several recent deals, buyers have offered to install a kitchen or supply appliances for a downstairs unit to ensure the bank recognizes the space as a finished accessory dwelling.

This behavior reflects a new type of buyer. These buyers evaluate homes as potential income properties that can offset mortgage payments, not only as single-family residences. Buyers are now willing to invest in completing these units as part of the purchase, indicating a change in how they assess the long-term value and affordability of a property compared to just eighteen months ago.

For sellers, this creates an opportunity to highlight unfinished basements or non-conforming accessory spaces as candidates for conversion. Properties once viewed as requiring remediation to remove illegal apartments can now be marketed for income potential, provided they meet lender requirements for completed units.

Market and Investment Implications

This shift is especially relevant for investors targeting Long Island’s residential market. Properties with existing accessory units or convertible spaces now have increased appeal, as buyers can qualify for larger mortgages based on anticipated rental income. The policy change lowers the entry barrier for first-time buyers and creates opportunities for investors pursuing multifamily conversions.

Pappas says his team is now prioritizing this trend in their listing strategy. “This is definitely something we’re leaning into for the 2026 market because it’s getting a lot more popular,” he says. By emphasizing a property’s accessory unit potential, the team seeks to make listings more competitive and increase buyer financial flexibility.

The trend also addresses the region’s ongoing affordability challenges. By allowing buyers to offset mortgage payments with rental income, lenders are expanding the pool of qualified buyers. Many of these buyers might not qualify under traditional lending standards.

Pappas calls this the most significant market change in recent memory. “That’s been by far the biggest change overall in the last eighteen months,” he says.

How One Long Island Team Is Marketing ADU Potential

The Perry Pappas Team, which closed nearly $60 million in sales last year, has begun to include potential accessory dwelling units in both listing presentations and buyer consultations. The team works primarily with first-time buyers, who represent 80 to 90 percent of its clients. The team says that qualifying based on projected rental income is helping buyers who would previously have been priced out.

For sellers, the team now evaluates properties for accessory unit conversion potential during the listing process, advising clients on whether completing or legalizing these spaces could attract more buyers or support higher prices. This approach replaces the traditional view of accessory units as liabilities requiring disclosure or removal.

If lenders continue updating underwriting standards for accessory units, the trend may expand. Properties with existing or potential accessory units may see increased valuations, and buyers who can demonstrate plans to finish these spaces may have an edge in competitive bidding.

Looking ahead, the integration of accessory dwelling units into mortgage calculations is shifting both buyer and seller behavior on Long Island. For buyers, it can mean the difference between qualifying for a home or remaining on the sidelines. For sellers, it opens new marketing strategies and pricing possibilities. As affordability pressures persist, this shift in lending practices may play a central role in shaping the region’s residential market over the next several years.