New SUPPLY Act Creates Federal Loan Insurance for Building Backyard ADUs: What It Means for Homeowners

The Supporting Upgraded Property Projects and Lending for Yards (SUPPLY) Act aims to boost the national housing supply by making it easier and cheaper to finance the construction of Accessory Dwelling Units (ADUs)—those backyard cottages, basement apartments, or garage conversions we keep hearing about. The core of this legislation is directing the Secretary of Housing and Urban Development (HUD) to establish a new federal insurance program within two years. This program will specifically insure second mortgages or liens taken out solely to pay for building an ADU on a property.

The New Federal ADU Insurance Program

Think of this like FHA insurance, but for your backyard project. Currently, getting financing for an ADU can be tricky, often requiring expensive personal loans or cash. This new program changes the game by using federal backing to reduce risk for lenders. The maximum loan amount insured is capped, generally limited to 30% of the standard FHA limit for a single-family home. However, here’s the smart part: if the ADU is expected to generate rental income, HUD can increase the maximum insured loan amount based on 50% of the projected annual rent. For a homeowner looking to build a unit to house an aging parent or generate passive income, this is a huge potential boost to their financing options. If you want this insurance, you’ll have to apply and pay an annual premium, which is capped at 1% of the principal amount being insured. This cost is something borrowers need to factor in, as it adds to the monthly payment, but it’s the price of federal risk mitigation.

Opening the Floodgates for Lenders

Section 3 addresses the other half of the financing puzzle: making sure lenders actually want to write these loans. The bill requires the Director of the Federal Housing Finance Agency (FHFA) to allow Fannie Mae and Freddie Mac to buy and package these newly insured ADU loans into securities. This is crucial because it creates a liquid, national market for these loans. Without Fannie and Freddie buying them up, local banks might be hesitant to lend. By giving them a clear exit strategy, the bill encourages more lenders to participate, potentially leading to lower interest rates for borrowers. The FHFA Director does have a safety valve, though: they can prohibit Fannie and Freddie from buying these loans if they determine that market pressures create an unfixable risk, but they must notify Congress first. This is a safeguard against a sudden housing bubble fueled by too much ADU debt, though the criteria for 'too much risk' are still pretty vague and left to the Director’s discretion.

Real-World Impact on Your Property

If you’re a homeowner in a high-cost area, this bill could be a game-changer. For example, a young family struggling with mortgage payments could use this insured loan to build a detached unit and rent it out, using the projected rental income to qualify for the loan in the first place. The bill ensures that any ADU built using this insurance must meet at least one of the three most recent versions of local building codes, which is a good protection against shoddy construction. Ultimately, the SUPPLY Act attempts to use federal financial muscle to unlock the potential of ‘missing middle’ housing, allowing individual property owners to become micro-developers and add much-needed rental stock to their communities.