ADU Construction Financing: Opportunities to Expand Access for Homeowners

Expanding the construction of accessory dwelling units (ADUs)—a secondary, often backyard home on a single-family lot—offers benefits to individual homeowners and has the potential to increase the supply of affordable homes and bridge the racial wealth gap in the U.S. A new paper ADU Construction Financing: Opportunities to Expand Access for Homeowners, co-authored by the Terner Center and the USC Lusk Center for Real Estate, maps the current landscape of financing options available to homeowners for the construction of an accessory dwelling unit (ADU) and offers recommendations for improving existing mortgage products that could help more homeowners build an ADU.

Informed by interviews with 30+ experts in the field and a literature review, the authors find that most homeowners who have built an ADU have used cash and a mortgage to finance construction, with home equity loans and cash-out refinancing the most common mortgage types. The authors find renovation loans backed by government-sponsored enterprises Fannie Mae and Freddie Mac as well as the Federal Housing Administration, may be well positioned to facilitate greater ADU construction, but specific reforms are needed to encourage greater uptake. This should include changes such as including consideration of ADU rental income in underwriting, changes to how ADUs are appraised, and shifts in renovation loan eligibility requirements.

Read the full paper on our website here.