While some wealthy homeowners can afford to fund the construction of an ADU out of their own pockets, most people will need to find financing for their project. One of the most common ways to fund ADU construction is through a home equity loan, also known as a second mortgage. This type of loan requires the property owner to have sufficient equity in the home in order to qualify. However, it is worth noting that not all homeowners can qualify for this type of loan.
Home equity loan
A home equity line of credit (HELOC) is a typical method of securing financing for an ADU construction. These loans are secured by the equity in your home and require no money down. However, HELOCs tend to carry higher interest rates than a conventional mortgage. To avoid the risks of interest rate increases, you should consider making extra payments on your HELOC. A second mortgage, on the other hand, will require you to pay back the entire loan amount.
When applying for a home equity loan to finance an ADU construction, you should be prepared to discuss your plans with a lender. Be sure to thoroughly explain your needs, including the reason for the addition. Confirm that it is legal to use the space for such a purpose in your jurisdiction. Be sure to know the exact timeline for the construction, as well as any required service providers. Once you have this information, you can begin the process.
Fannie Mae loan
Financing the construction of an ADU is an excellent option for homeowners who want to build additional living space on their property. Fannie Mae loans can be used for this purpose, but not all lenders offer unique ADU financing programs. You must have a high credit score and a good household income to qualify for one of these loans. You will need to provide details about your project, choose a certified contractor, and agree on a fixed price. The lender will hold the funds until the construction of your ADU is complete, and will review the site for quality and value.
Another option is to apply for a HELOC. This type of loan is similar to a second mortgage, but requires more equity than a conventional mortgage. The advantage of an HELOC is that you can tap into the equity that you already have in your home, which is usually between 80 to 90 percent of the property’s value. If your home is worth approximately $700K, you can qualify for a HELOC with 80% LTV.
Construction loan
One of the biggest mistakes a homeowner can make is to assume that they can borrow money at a high interest rate for ADU construction. Instead, they should look into securing the funds needed for their project and hiring a certified contractor. This way, the lender can review the project’s construction site and assess the project’s value before approving financing. The process of securing the funds for ADU construction should not be a stressful one, and will also ease any stress you may have about the finances.
Construction loans are available from lenders and can be packaged with a purchase loan for an ADU. This is an excellent option for new homeowners or investors looking to buy an ADU-suitable property. The Homestyle loan is a 30 year fixed rate mortgage that combines a construction loan and a purchase loan. Refinancing is also possible with the same loan. Many lenders will handle the refinancing process without incurring any fees. Another option for financing ADU construction is a Jumbo construction to permanent single-close loan. A construction loan with this type of financing is typically up to 95% LTV.
Peer-to-peer lending
Peer-to-peer lending for the construction of an ADU is a popular option for homeowners looking to add an extra unit to their property. This type of financing is typically provided by wealthy individuals, and requires rental income streams to pay back the loan. Unlike equity loans, private-money loans are more flexible and can have more discretionary terms, which allow for more creative structure and faster underwriting. However, ADUs are not the only type of construction project that can be funded this way.
Before applying for funding, it is important to know your budget and the returns you will receive from the project. It is also helpful to have some cash on hand in order to pay for preliminary design and feasibility work, as well as any required permits and other costs. Once you have these funds, you can then contact lenders to get more specific terms for the project. Once you have secured funding, you can begin the construction phase!
