ADU Financing is a lot more complicated now that interest rates are increasing. The common methods like Cash-Out Refi and Equity Line Of Credit may no longer be practical.
The good news is that there is a lot of pressure on lenders to come up with innovations and loan products that will make ADU financing easier, faster, and more widely available.
I moderated a huge webinar in financing innovation for the California Association of Realtors this month. An entire section was devoted to some of the recent and anticipated loan improvements for ADU financing. You can watch the webinar here: STEPS To Financing the Dream of Homeownership.
Some of the improvements include the ability to use anticipated rents from the ADU in the qualification calculations, the ability to finance manufactured and modular ADUs and improvements to the renovation loan.
Cash Out Refinance
The most common way to get ADU Financing is to refinance your current mortgage and take cash out to pay for your ADU. Rates are up, significantly, and this may not be an attractive option because you may lose your current mortgage rate.
However, the average rent for a one-bedroom ADU is increasing rapidly and is projected to rise for the foreseeable future. This option may still make sense when analyzed over the long run.
Home Equity Line Of Credit (HELOC)
A HELOC might be the way to go if you’ve recently refinanced your home at a rate significantly lower than today’s rate. This is an additional mortgage loan that sits along with your current primary mortgage.
This loan is a tiny bit more expensive and doesn’t carry the same tax advantages, but it can be useful.
The benefit is you can pay off this secondary loan with the profit from your ADU rental, leaving your primary loan in place.
Each time you increase the rent, put that increase toward the principle. It is possible to pay off the entire equity line of credit in less than 10 years!
FHA Renovation Loan
A renovation loan is a government that can go as high as 110% of the projected “after renovation” value.
This means you can build an ADU with zero money out of your pocket. As you might imagine, this isn’t for everyone, but when it works it is golden!
The total loan must be less than the FHA loan limits in your area. In Los Angeles County the limit is $970,800 starting in 2022.
Frankly, it is hard to find a single family home under $600,000 in the popular areas of LA County, but a smart person with an investment eye could make it happen.
Reverse Mortgage
You probably have the wrong idea when you imagine a reverse mortgage. If you are a senior with a fixed income, a reverse mortgage can be a VERY smart move! It is very safe and can dramatically improve your lifestyle and sense of security.
It is possible to get a reverse mortgage, build an ADU, and wind up ADDING money to the value of your estate. READ THIS POST to get details and find out how that all works.
How Much Down Payment Is Required?
Each loan option has different requirements. Other factors include your home’s equity, as well as your income, credit and current debt. A renovation loan, as an example, requires just 5% down payment.
Ready For Specific Answers?
Any qualified mortgage lender can help you with these loans. However, we work with lenders who specialize in ADU financing. They are almost an ADU financial counselor, guiding you to the very best choices.
Get our Free Consultation and we’ll help you figure out your next best steps.
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