Shelterforce: How Financing Barriers Keep ADUs Expensive

By Shelby R. King, Shelterforce

Lenders feel safest when a loan is “conforming,” which means its terms meet Fannie Mae and Freddie Mac standards. So if Fannie and Freddie aren’t counting projected rental income, underwriters typically won’t either. Without that allowance, most homeowners can’t get approved for a construction loan or open a HELOC to finance the build.

“In the finance space, clearly federal lenders—the GSEs, the Fannies and Freddies—need to decide that the future income from [renting out] an ADU can be used to size a loan for a homeowner who is house rich and cash poor,” says Denise Pinkston, founder and board president of Casita Coalition. “If they don’t do that, the people who will be hurt the most are the people we want the most to help: low- and moderate-income homeowners, seniors on a fixed income, communities of color.”

Pinkston says without buy-in from GSEs, “this will be re-redlining, because we will be preventing people from having access to capital” while at the same time leaning on the private market, through ADU construction, to solve the nation’s affordable housing crisis.