A Curveball to the GSEs
If the proposed bill becomes law, homeowners could access federally backed, second-lien mortgages to finance the construction of Accessory Dwelling Units (ADUs). Typically, ADUs have been funded through home equity loans or personal savings.
Various housing organizations, including the National Association of Home Builders and Mortgage Bankers Association, have voiced their support for the legislation. They believe it will enable homeowners and future homeowners to build generational wealth and equity, while also tackling the nation’s housing supply crisis.
However, industry leaders caution that federal backing alone won’t eliminate all obstacles. Challenges related to valuation, underwriting, and builder capacity continue to hinder the widespread adoption of ADUs as an affordable housing solution.
A Clear-cut Loan Type
Scott Bailey, co-founder and co-CEO of Bequall, a company specializing in ADU design, manufacturing, and installation, believes that this potential law is a step towards establishing ADU policies that address the risks and underwriting issues associated with the product.
For example, Bailey highlights that currently, banks may only offer homeowners a Home Equity Line of Credit (HELOC) for building an ADU, based on existing home equity rather than the potential value the ADU could add. The lack of consistent appraisal and underwriting standards for ADUs limits financing options. A federal framework for valuing ADUs would provide lenders with the certainty needed to finance them more widely.
Bailey also emphasizes the need for a specific loan type for ADUs. He suggests breaking the loan into two parts – a bridge loan for construction and a low-cost permanent financing option to incentivize banks to participate in ADU financing.
Federal Financing Needs to Accommodate the Modern-day Buyer
Dallas points out that the growing use of ADUs in densely populated areas reflects a cultural shift towards multi-generational housing and changing consumer preferences. As a result, federal financing entities must adapt to cater to modern-day buyers and investors.
He believes that everyone stands to benefit from promoting ADU construction – homeowners, property investors, tenants, labor, and the environment. By utilizing existing housing stock and addressing housing shortages, there is an opportunity for a green and social impact.
Another challenge highlighted by Bailey is the difficulty faced by small builders, particularly as ADUs gain popularity amidst housing inventory shortages. Supporting small “infill” builders with scalable financing products could lower barriers to entry, allowing them to expand and contribute to local housing production.