The Push to Make Tiny Homes in Backyards Easier to Finance

A pair of congressmen from California and New York plan to unveil a bill on Friday that would create a government-backed loan program for homeowners to finance the construction of tiny homes on their properties.

The bill aims to boost building of accessory dwelling units, or ADUs, in a new effort to tackle the nation’s severe housing shortage. These add-ons are small, studio-style housing units, usually between 600 and 1,200 square feet, that can supplement an existing home in the backyard, garage or basement.

Rep. Sam Liccardo, a Democrat from California who co-led the ADU bill with Rep. Andrew Garbarino, a New York Republican, said the federal government has waited too long to tackle the housing affordability issue.

“This is a really pressing issue for Americans,” Liccardo said. “But it has not become nearly pressing enough for Congress.”

At least 1.4 million single-family homes in the U.S. had such units as of 2020, and their popularity is rising as more homeowners seek ways to lower their housing costs by building and renting out units like these. Others build them to house adult children or grandparents, and home builders are increasingly including ADUs as a new amenity.

State and city governments see them as a way to create more places for people to live faster than building full-size multifamily properties that may require more contentious and time-consuming public hearings.

The U.S. is short roughly four million homes. Almost a third of all households are considered “cost-burdened,” meaning they spend more than a third of their income on rent or mortgage payments. That housing affordability problem is now becoming a political one for elected officials.

State officials in recent months have started to address the need for more housing. Most notably, California Gov. Gavin Newsom recently pushed through two laws that hollowed out the California Environmental Quality Act, which put developers through a lengthy environmental review and undermined new housing development. 

But federal lawmakers have dragged their feet on major housing legislation. Besides occasional one-off provisions, Congress hasn’t passed a significant policy package focused on boosting housing supply since the Low-Income Housing Tax Credit of the 1980s. President Trump expanded access to the program in his tax package that recently became law.

The bipartisan ADU bill represents a rare, if still limited, attempt by Congress to take on the housing crisis. The legislation has endorsements from at least 16 Democratic and Republican House members, along with the National Association of Home Builders and other industry groups.

It aims to ease the risk for private lenders to offer second mortgages for ADU construction by providing a government backstop in case the homeowner defaults. Analysts say expanding ADU loan access may indirectly pressure local governments to reform their zoning laws and building codes to allow more of these units.

“If residents have an understandable and reliable means of financing ADUs, it puts the spotlight on localities as the thing holding them back,” said Scott Wild, a consulting principal at John Burns Research and Consulting. 

An improved ADU-financing system isn’t a magic bullet for the U.S. housing crisis. Builders still face the complex web of local red tape and so-called Nimby pressures that have slowed new construction for decades.

But Liccardo said other proposals like homeownership programs are expensive, controversial and harder to get through Congress.

“This happened to be a lower-hanging fruit,” said Liccardo. “It helps to start in an area where you can actually get something done.”

California has led the way in encouraging these units and is experiencing something of an ADU boom. In 2023, the state built roughly 23,000 new ADUs, more than seven times the number in 2018. As the former mayor of San Jose, Liccardo was one of the politicians spearheading zoning reform to promote this development.

Other states are following suit. Colorado, Oregon, Arizona, Hawaii and others have all issued their own mandates to motivate ADU production.

But as ADU popularity grows, so do the financing gaps. Not all homeowners who want a tiny home add-on can afford to build one. And because an ADU is still a nascent, less traditional construction product, lending options are few and far between. 

That means that more ADUs skew luxury, built by homeowners who can pay all cash or easily secure a home-equity loan. 

Liccardo and Garbarino’s bill directs the Federal Housing Administration to provide government backing for second mortgages to finance ADU construction. It also allows Fannie Mae and Freddie Mac to purchase and securitize those loans, which would allow lenders to take these second-lien loans off their books.

“Financing is by far the No. 1 blocker for more ADUs,” said Sean Roberts, chief executive of California-based home builder Villa Homes. Over the years, many of his company’s potential projects haven’t even moved forward to the contract stage because his clients can’t get a loan that works for them.

The various uses of ADUs make it difficult for appraisers to assess them on a standard basis, which in turn makes it hard to get a loan.

“That’s where I think the federal government can really add something,” Roberts said.