The Insuring Second Liens for Accessory Dwelling Units: Explained

Overview: Insuring Second Liens for Accessory Dwelling Units

The Insuring Second Liens for Accessory Dwelling Units would direct the Department of Housing and Urban Development (HUD) to create a mortgage insurance program for certain second liens used to build an accessory dwelling unit (ADU) on a property you own.

In plain terms, the proposal aims to make it easier for homeowners to finance an ADU by adding a federal insurance option to a second mortgage used for the project. The bill also addresses how these loans could flow through the housing finance system by directing the Federal Housing Finance Agency (FHFA) to allow purchases by Fannie Mae and Freddie Mac.

The bill was introduced in the one hundred nineteenth Congress and applies to a House proposal, H.R.4479.

Note that bills often change on their way to becoming law, so this page will update as new details emerge. For real-time updates, subscribe to our newsletter.

What Is the Insuring Second Liens for Accessory Dwelling Units?

The Insuring Second Liens for Accessory Dwelling Units is a proposal for a new HUD insurance program focused on second liens that finance ADU construction. A second lien is an additional loan secured by your home, separate from your primary mortgage.

HUD would be required to establish this insurance program within two years. Once created, the program would insure eligible second liens that are used for building an ADU on an owner-owned property.

The bill also includes direction for how these insured ADU loans may be handled by the broader mortgage market, which can support availability and pricing over time.

Who Qualifies for the Insuring Second Liens for Accessory Dwelling Units?

The bill sets a clear ownership requirement for the borrower. To be eligible under the Insuring Second Liens for Accessory Dwelling Units, you must apply and certify that you own the property where the ADU will be built.

Beyond ownership, eligibility would also depend on the program rules HUD establishes for the insured second lien, including the loan’s size limits, premium rules, and the ADU’s required features.

This structure keeps the program focused on adding an ADU to a property you already own.

How The Insuring Second Liens for Accessory Dwelling Units Works

The Insuring Second Liens for Accessory Dwelling Units sets program guardrails around the loan amount, the ADU requirements, and the insurance premium.

Loan Size Limits For An Insured ADU Second Lien

The maximum insured second lien would be the lesser of:

• Thirty percent of the Federal Housing Administration (FHA) 203(b) one-unit loan limit
• One hundred percent of the property’s value after the ADU is completed

The bill also provides a way for the loan cap to be increased using rental income. Specifically, the cap may be increased using fifty percent of the projected annual rental income from the ADU. That feature connects loan sizing to the ADU’s expected cash flow.

These limits are designed to keep the insured second lien tied to the home’s value and the project’s purpose.

ADU Requirements Under The Insuring Second Liens for Accessory Dwelling Units

To qualify as an ADU under the proposal, the unit must include:

• A kitchen
• A sleeping area
• A bathroom

The ADU can be built in several ways, including a modular or prefabricated unit, a manufactured unit, or a conversion of existing space. This gives homeowners flexibility across different property types and construction approaches.

Mortgage Insurance Premium Cap

The bill caps the annual insurance premium at one percent of the insured principal balance. In practice, that means the annual premium rate cannot exceed 1% for the portion of the second lien that is insured under the program.

Treatment By Fannie Mae And Freddie Mac

The bill directs the Federal Housing Finance Agency (FHFA) to allow Fannie Mae and Freddie Mac to purchase and securitize these insured ADU second liens. That can support a steady market for lenders that originate the loans.

FHFA would also have authority to pause purchases when FHFA determines there is excessive market risk that cannot be mitigated. The bill states FHFA would provide written notice to Congress when taking that step.

Taken together, these parts are meant to support ADU financing through an insured second lien and a secondary market outlet for those loans.

Who Sponsors the Insuring Second Liens for Accessory Dwelling Units?

H.R.4479 is a House bill in the one hundred nineteenth Congress. Sponsor and cosponsor details can change as the bill moves through committees and debate.

For the latest legislative updates and cosponsors, see the Bill Tracker above.