
Building an ADU can be a great investment for you and your family. They can improve your property value, create extra living space, and potentially bring in rental income. However, figuring out how you are going to pay for their development can be tough. That is why we put together this list of the best ADU financing options.
1 Home Equity Loans And HELOCs
The most common way people finance their ADUs is with home equity loans or HELOCs. These loans allow you to borrow against the equity you have in your home. It is important to remember with these loans that if you don’t pay, they are backed by your home. Meaning you could lose your home if you miss too many payments.
2 Local Government Grants And Loans
Many states in the U.S. have created incentives to get people to build more ADUs. If you live in a state battling homelessness, chances are there are a number of grants and loans available to you. For example, California has the CalHFA grant that gives low-income families the ability to get up to $40k for pre-construction costs.
3 Cash-Out Refinancing
This option is great if you are looking to get a lower interest rate on your mortgage. It allows you to replace your current mortgage with a bigger loan. You will receive a lump sum payment that you can use to finance your ADU and then pay back over time with your monthly mortgage payment.
4 Construction Or Renovation Loan
These loans work by having an appraiser assess the current value of your home and the expected value once the ADU is built. The bank will then give you a percentage of the expected difference which can be up to 95%. Banks disperse the money after you complete certain steps of the development process. Not all banks offer this loan though, so do your research to find out what banks near you will.
5 CDFI/ Local Partnership Loan Programs
Using one of these loans allows you to use projected ADU rental income towards qualifying for a loan. The only catch is that you must rent out your ADU once it is built.