ADU FINANCING
What are ADU Financing options?
Once you’ve learned about Accessory Dwelling Units and expected ADU costs, you’re ready to tackle a crucial step: deciding how to build and finance a granny flat. Whether you’re building an ADU for family, securing rental income or creating extra space, making the financing work is essential.
- If you have equity in your house ⇒ best path would be a Line of Credit on the house
- If you don’t have equity in your house, but your current loan value is less than $550K ⇒ a Homestyle Renovation Loan could cover the construction of the ADU by using the future value of the property with the ADU, up to a total loan value on the home of $753K (e.g. if you already have a $500K mortgage on the house, there is potential to get a $250K renovation loan for the ADU construction)
- If you don’t have equity in your house but you have a FICO score of 720+ ⇒ you could consider a 2nd Position Construction Loan that will cover the building costs (and is not limited on loan value like the Homestyle option). Once the ADU is completed, you can refinance into a single loan.
Read on for more on each of these options, plus other paths for ADU financing in California. We’re happy to work with you and your lender to ensure you have the plans, scope of work, and budget required to submit for loan documentation.
Best ADU Financing options
Renovation Loan
If you don’t have much equity in your home, a renovation loan could be a great option for ADU financing. A home renovation loan is based on one key factor: after renovation value. Renovation loans use a home’s estimated after renovation value instead of its current home value to calculate how much a homeowner can borrow. Renovation loans are the ONLY type of loan that give homeowners credit for a home’s future value.
Construction Loan
A construction loan is a short-term loan that funds building a home. These loans are typically for less than one year, and the funds are paid out in a series of installments, known as "draws," while the home is being built.
With this type of loan, you have one loan for the construction phase and another loan for the mortgage phase once the house is completed. The second loan pays off the construction loan.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new home loan for more than you owe on your house. The difference goes to you in cash and you can spend it on the construction of your ADU. You must have equity built up in your house to use a cash-out refinance.
Here’s how a cash-out refinance works:
Typically cash-out amounts to 80% of your home’s equity.
In other words, you Can’t pull out 100% of your home’s equity. If your home is valued at $800,000 and your mortgage balance is $500,000, you have $300,000 of equity in your home. You can refinance your $500,000 loan balance for $640,000, and receive $160,000 in cash at closing to pay for your construction.
Home Equity Conversion Mortgage (HECM, ages 62+)
A HECMis a mortgage loan, usually secured by a residential property, that enables the borrower to access the value/equity of the property. The loans are typically promoted to older homeowners and typically do not require monthly mortgage payments. HESM’s are increasing in popularity with seniors who have equity in their homes and want to supplement their income.
Home Equity Line of Credit (HELOC)
A home equity line of credit is typically the simplest way to finance an ADU. Primary residences can typically have up to 80-90% Loan-To-Value (“LTV”). So if your home is appraised at $700K and your current loan is only $400K, you could expect to access a credit line of $160K (80%*). A HELOC allows for flexibility, as you can draw down the credit line as you need the funds – you are only charged interest on the amount of credit used.
VI. Hard Money Loan
This program is usually for investors with rental property that has a lot of equity. The typical program funds 65-70%% loan to value (LTV) on the property. This type of loan is typically short term (6-18 months) and has higher interest rates (8-12%) than most other loan types.
