Funding proves a barrier for ADUs

Secondary suites are increasingly legal. But are they affordable?

This is the problem revealed by a report this month published by the Lusk Center for Real Estate at the University of Southern California and the Terner Center for Housing Innovation at the University of California at Berkeley.

Specifically, building secondary suites – or ADUs – which are second homes on a parcel of land zoned for single-family dwelling comes at a high cost.

State and local governments — and now Washington — see ADUs as a prime way to address a housing shortage in the United States that the National Association of Realtors set at 5.5 million fewer units than necessary. The Joe Biden administration has largely identified this funding problem. But it’s unclear what concrete steps the federal government might take.

“ADUs, however, are less expensive than other forms of housing, require significant financial resources to build,” asserted the study, which surveyed more than 800 homeowners in California who have built licensed ADUs.

The problem, according to the authors, is therefore to find favorable financing. Homeowners who build an ADU — whose total construction costs exceed $150,000, according to the report — use cash refinances, home equity loans and renovation loans.


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According to the study, these loans are granted on unfairly unfavorable terms because government-sponsored companies fail to take into account important considerations, just like public lenders.

For example, while Fannie Mae and Freddie Mac generally recognize rental income as collateral for loans, they often do not consider ADU rental income as stable income.

“Fannie Mae’s sales guidelines state that a loan must qualify for a mortgage without consideration of ADU rental income,” the report said, adding that “a limited exclusion exists for low-income borrowers.” .

Since June, Freddie Mac allows some ADU income count as stable income for the borrower. “However, rental income cannot represent more than 30% of the borrower’s total stable income and the borrower must either have experience as an owner or have completed an owner training course,” the report states.

Also, Federal Housing Administration and veterans affairs the guidelines state that the borrower must occupy the house for which he takes out the loan. This closes the door to a borrower looking to lease the ADU they are building.

Therefore, the study found that the ADUs being built came from people who could afford to pay the full money for the construction of the second homes or absorb the loan terms.

The study comes at a time when affordable housing advocates and real estate professionals seeking a solution to the affordable housing crisis have begun to turn away from simply campaigning to legalize ADUs and examine their general feasibility.

An idea sometimes mentioned before, including the 1980sto increase the housing stock, ADUs are also called “grandmother’s flats” – a place to house extended family.

But with almost non-existent land available to build new single-family homes near employment centers, the state of California moved to legalize ADUs, effectively overriding local zoning laws.

ADUs were legalized statewide in 2017. A subsequent California law stated, “Any covenant against the construction of ADUs is void and unenforceable.”

Oregon and Connecticut followed suit by legalizing ADUs. But it is mainly the big cities that act. Chicago, Seattle, Boston, Minneapolis, Washington, DC and Salt Lake City have each passed laws in the past two years legalizing ADUs.

Also, the Joe Biden administration in May announcement a “housing supply action plan” that makes gestures towards ADUs, including rolling out “new funding mechanisms to build and preserve more housing where funding gaps exist”.

The Federal Housing Administration and Federal Housing Finance Agencywho oversees government-sponsored giants Fannie Mae and Freddie Mac“explore ways to help lenders pilot and scale renovation and construction financing for ADUs.”

The White House Biden has set a goal of creating more than one million ADUs over the next five years.

Freddie Mac estimated the number of ADUs nationwide at around 1.5 million, but the number is over a year old. A spokesperson for Freddie Mac said the GSE did not have an updated figure.

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