The housing landscape is shifting. With high interest rates, low inventory, and a demand for multigenerational living, accessory dwelling units (ADUs) — also known as granny flats, carriage houses, or in-law suites — are booming. As of April 1, 2026, an ADU ordinance even took effect in Chicago aimed at tackling the housing shortage, allowing 34 of Chicago’s 50 wards to build additional dwelling units.

For homeowners, ADUs can create additional living space, accommodate family members, or generate rental income. For investors, they can increase functionality and property value. But before rushing to buy, build, or purchase property with an existing ADU, it’s especially important to understand the legal and title implications.

Understanding title underwriting for ADUs isn’t just for attorneys. Brokers and lenders need to ensure smooth transactions, and a proactive title review can help everyone avoid closing-day surprises. Below, we’ll explain more and help you better navigate the complexities of ADUs.

Why title matters before breaking ground on an ADU

Before investing in design, permitting, and construction, homeowners and developers should order a preliminary title report as part of their ADU feasibility study. A title report will help reveal what rights and restrictions already affect the property, such as:

• Easements and encroachments: A title report reveals utility, sewer, and drainage easements that may give third parties rights to use portions of the property.  An encroachment — when a structure, fence, or landscaping illegally crosses a property or utility line — can halt, delay, or force costly redesigns. Building an ADU that encroaches on a hidden or unknown easement can lead to devastating consequences, including the city or utility company demanding the structure be removed.
  
• CC&Rs, HOAs and deed restrictions: Even if the local city zoning allows ADUs, a property’s recorded covenants, conditions, and restrictions (CC&Rs) or deed restrictions may impose additional limitations. Homeowner’s Association (HOA) rules can also restrict detached structures, rental uses, occupancy, or other aspects of an ADU.

Underwriting hurdles and common title defects with ADUs

Existing ADUs can create an entirely different set of challenges, particularly when the structure was constructed without the necessary permits. Buyers, agents, attorneys, lenders, and title professionals should work together to identify what exists on the property and whether the records support how the property is being marketed and used. Here are a few examples:

• Unpermitted structures: If an existing ADU was built without proper permits, it may create complications involving zoning, property records, appraisal, financing, insurance, and future resale.
  
• Zoning and setback violations: ADUs that exceed size limits or violate property line setbacks represent non-conforming uses that can cloud the title and complicate a sale. The earlier these questions are identified, the more options the parties generally have for addressing them.
  
• Buyer liability: In all cases, it’s important to understand that title insurance protects against defects in the title, not construction defects or zoning violations. This means that if a buyer purchases a home with an unpermitted ADU, they inherit the liability. Certain ALTA Homeowner’s policies might offer some coverage, but proactive research before making the purchase is always best. 

ADU Financing, refinancing, and lender requirements

Recent updates from Fannie Mae and Freddie Mac have made ADUs more attractive to homeowners and borrowers. In some cases, lenders can now consider rental income from an ADU when determining whether a borrower qualifies for a mortgage. However, the addition of an ADU is considered a significant alteration to the property, which will require increased underwriting scrutiny.

If a homeowner refinances to fund their ADU construction, or if they are buying a property with an ADU using an FHA or conventional loan, the lender will require a new lender’s title insurance policy to ensure the ADU doesn’t jeopardize their lien position.

Avoid costly mistakes with Landtrust

ADUs are a fantastic option for many homeowners, but they require careful legal and title diligence to avoid costly mistakes. As the real estate environment continues to evolve rapidly, working with a trusted team of title experts gives agents and attorneys a competitive advantage. 

Working on a deal involving an ADU? Don’t let hidden title issues derail your closing. Reach out to the experts at Landtrust Title Services today for individualized support and proactive title solutions.