Accessory housing units (ADUs) are growing in popularity as a possible alternative to senior housing in its later years. Many seniors want to live independently but live near family members, and ADUs can allow seniors to live their lives autonomously while staying close to their loved ones.
While a reverse mortgage loan may not be the first choice for financing the construction of an ADU, it is a viable option in the right situation—as long as specific requirements are met, according to Renee Constantine, director of the reverse mortgage division at Astar Mortgage. goes. RMD spoke with Constantine to learn more about how ADUs and reverse mortgages can work together.
Getting a Reverse Mortgage
Constantine began looking into how reverse mortgages might affect the construction of ADUs after an inbound call.
“I was actually approached by an ADU builder about five years ago,” Constantine said. “They were putting together a workshop in San Diego and they were looking for financing options. They contacted me to see if the reverse would work for ADUs, and it does.
Constantine then researched and presented at an event at the University of San Diego on how an ADU can work in a reverse mortgage transaction.
“It was fantastic, and it was before ADUs were cool, I think,” she said. “Nobody really knew what they were, and the city of San Diego hadn’t set guidelines for them yet. But they’ve come a long way in the past five years.
However, a customer cannot use their reverse mortgage funds to pay for the ADU they will be living in. The reverse mortgage client needs to be the person who owns the primary property on which the ADU will be constructed, as Constantine mentioned earlier.
One factor that has made it easier to use reverse mortgages to finance ADUs was the passage of California Senate Bill 9, the Housing Opportunity and Greater Efficiency (HOME) Act passed in 2021. That law created a legal process for homeowners to more easily increase their properties by increasing the number of possible housing units on blocks of land previously zoned for single-family residences.
With SB9, approvals have been streamlined, because it’s easier to make an ADU, Constantine said.
a mine remains
That said, it can still be complicated to make ADUs work, as there are many factors that must align for it to be a viable option, Konstantin said.
“You have to work with [ADU-specialist] Contractors, mainly,” she said. “It’s what they do, just like reverse mortgage professionals who primarily do reverse mortgages. That’s their specialty. They told me they know people in their local town, they know who they talk to.” and they know what is required. And you definitely have to let the contractor do the heavy leg work for the construction side of it, and work closely with them every step of the way.
The contractor handles most of the work related to rules and regulations, she said. However, due to the consultative processes associated with reverse mortgages, it would not be unusual for the loan originator to act as an intermediary between the customer and the contractor, she said.
“With a reverse mortgage, you never really say goodbye to the borrower,” Constantine said. “You will be with the contractor the entire way they work. And even if they’ve already got their funding, you’re still available for questions and that sort of thing.
Different loan types and utility
Constantine said she hasn’t taken out an H4P loan yet, but she can see how it could be of use to those looking to build an ADU. She also noted that Finance of America Reverse (FAR), HomeSafe Second’s proprietary alternative, is a possible route toward ADU.
Still, according to Constantine, there is confusion among consumers about any mortgage product outside of the traditional forward loan.
“It seems like people get really confused for some reason if it’s not fixed 30 years,” she said. “It just throws them for a loop. So, you have to educate [any partner] both sides. You have to educate the borrower and [real estate agent] or financial advisor regularly.
However, with ADUs, it may be easier to understand, Konstantin said.
“With the construction of the ADU, it will be like a refinance, where they will get the money and then go from there,” she said. “So, I think it will be a little more streamlined, and people will understand a little easier.”
There is also an opportunity for a reverse mortgage business, as Constantine does not know of any peers who are offering loans to fund ADU construction.
“I don’t know any reverse mortgage professionals who even have this on their radar,” she said. “So the more we can get the word out, the more likely it becomes. I don’t think many people know what the word ‘edu’ is. A lot of it also depends on locality, and now that California has SB 9, it’s becoming more common and more popular. But I don’t think a lot of reverse people even know about it, or how it might work for them.