5 Ways To Finance an ADU Using Post-Construction Home Value
Surprisingly, some lenders are now letting homeowners obtain ADU construction financing based on the future value of their homes as if the ADU were already there. This lets homeowners leverage more equity to pay for construction costs.
And it's sorely needed.
You probably won’t be shocked that building an accessory dwelling unit or ADU costs six figures.
Renofi estimates the cost to be between $100,000 and $300,000, while Maxable bumps that up to $350,000 in high-cost areas like Seattle.
The bill could run half a million dollars in places like the Bay Area, says Progress Builders.
With price tags like these, how does someone finance an ADU?
City and state governments across the U.S. like Seattle and California are hoping ADUs will ease the affordable housing crisis. They are streamlining the process for homeowners to permit such projects. In fact, California now offers grants up to $40,000 for site prep, architectural designs, permits, and other ADU building costs.
As such, lenders are offering more programs than ever to fill a sizable hole in the lending landscape. As you’ll see, some companies are creating loan programs with ADUs in mind.
It’s a whole new world of ADU financing.
Check your eligibility for an ADU construction loan.
1. HELOCs Based On the Home’s Future Value
Most home equity lines of credit, or HELOCs, are based on your home’s current value.
But a few companies are now offering HELOCs based on the estimated future home value as if the ADU were already built.
For example, a traditional HELOC lender may offer a HELOC up to 90% of your current $400,000 home value. Assuming an ADU would add $150,000 in value to your home, certain companies could offer you 90% of $550,000.
Traditional HELOC | Future-Value HELOC | |
Current Loan Balance | $300,000 | $300,000 |
Home Value Used | $400,000 | $550,000 |
HELOC Loan-To-Value | 90% | 90% |
Max HELOC | $60,000 | $195,000 |
In this example, the homeowner likely doesn’t have enough current equity to build an ADU with a traditional HELOC. But their future equity could qualify them for a HELOC of nearly $200,000.
One example of a company offering such a product is Renofi, which specializes in renovation financing. While Renofi is not a lender, it partners with lenders to offer wide coverage for these and other renovation programs.
Plenty of local lenders are expanding offerings as well. OlyFed in Olympia, Washington offers the HELP Construction loan. It uses your as-completed value of the home and ADU to determine your loan amount. Like Renofi’s program, you don’t need to refinance your first mortgage.
E-Central Credit Union in Pasadena, California offers an ADU construction loan based on future value with no payments for 18 months during construction. When construction is complete, it converts to a fixed-rate second mortgage with regular monthly payments.
While the above examples only lend locally, those interested should inquire with credit unions, banks, and mortgage companies in their area to discover unique options for ADU construction.
2. Cash-Out Refinance Loan Based on Post-Construction Value
Homeowners now also have access to a cash-out refinance program that uses future home value as the lending basis.
A traditional refinance allows you to take a cash-out loan up to 80% of your home’s current value. But this doesn’t help homeowners that don’t have much equity in their homes.
Again, Renofi, is the leader in this space. It offers an 80% cash-out loan based on future value as if the ADU were complete.
Traditional Cash-Out | Future-Value Cash-Out | |
Current Loan Balance | $300,000 | $300,000 |
Home Value Used | $500,000 | $650,000 |
Loan-To-Value | 80% | 80% |
Max Cash Available | $100,000 | $220,000 |
This homeowner has access to an extra $120,000 by using the cash-out refinance based on future value after completion of the ADU.
Keep in mind, though, that this option will replace the existing first mortgage, potentially increasing the rate on the entire loan balance. Those with an ultra-low first mortgage currently should consider a home equity loan option first.
3. Fannie Mae HomeStyle® Renovation
Fannie Mae HomeStyle Renovation is a widely available program with which you can finance a renovation – including building an ADU – based on as-completed value.
While these loans are most commonly used to purchase and fix up a home, you can also use them to refinance and include extra funds to complete the project.
Your maximum loan is 95% of the as-completed value, which offers a lot of leeway for recent homebuyers who do not yet have much equity.
HomeStyle Renovation | |
Current Value | $300,000 |
As-Completed Value | $425,000 |
Maximum New Loan | $403,750 |
Existing Loan | -$275,000 |
Closing Cost Estimate | -$7,000 |
Funds for Project | $121,750 |
In this example, the homeowner had very little equity in the home. But they were able to secure over $100,000 for their ADU project based on 95% of the future value.
Most lenders in the country offer Fannie Mae loans, so you have more ability to shop for rates and fees with multiple lenders compared loans from Renofi or local credit unions.
4. Freddie Mac CHOICERenovation℠
The CHOICERenovation loan is nearly identical to HomeStyle, but offered by Fannie Mae’s sister agency Freddie Mac.
There could be slight differences between the programs, though, so if you are not eligible for HomeStyle, it’s worth asking your lender about this program.
5. FHA 203k
Perhaps the most lenient construction loan of all, FHA 203k allows you to borrow up to 97.75% of the property’s future value.
This gives homeowners – even those without perfect credit – access to funds for their ADU project.
Additionally, new rules state that you can use 50% of future rental income from the ADU to help you qualify for the loan.
For example, you plan to build an ADU that will bring in $1,500 in rental income per month. You can add $750 to your regular employment income to help you qualify for the future FHA loan.
FHA 203k | |
Current Value | $250,000 |
As-Completed Value | $350,000 |
Maximum New Loan | $342,125 |
Existing Loan | -$230,000 |
Closing Cost Estimate | -$7,000 |
Funds for Project | $105,125 |
Homeowners can qualify with credit scores down to 580 and with higher debt-to-income ratios compared to any other loan mentioned above.
The program isn’t perfect: you must replace your existing FHA or conventional loan with a new FHA loan, incurring one-time and ongoing mortgage insurance costs.
Still, FHA 203k is the program that could bring income-producing backyard ADUs to the masses.
Start Your ADU Project
Most homeowners think building a ADU on their property is a nice thought but nearly impossible.
But today’s loan programs make it a real possibility. And with local governments warming up to the idea of affordable housing, your local permitting office could become your ally instead of adversary.
Start the process by contacting a reputable renovation lender to check your ADU financing options.
Tim Lucas is the editor and Lead Analyst for MortgageResearch.com. Tim spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. He has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, and more.
