Financing your ADU
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We’re not a lending institution, but we can provide information about financing your accessory dwelling unit. You may want to contact a lending expert, to learn more about both traditional loans and alternative lending options.
8 Popular financing choices
1. Construction and renovation loans
Unlike loans based on the existing equity in your primary home, a renovation loan to pay for an ADU is typically based on the price your home will be valued at once all the improvement work is finished. Note, however, that the bank will usually want to approve the builder and will release funds over time as construction progresses.
Interest rates tend to be slightly higher than for refinancing (about 0.125 percent), and it’s usually a short-term loan (usually a year or less). But often a renovation loan can be a one-time close, meaning that any remaining debt when the term is up is automatically converted to 30-year financing—so, there’s may be no need to reapply or pay additional origination fees.
2. Home equity line of credit or loan
Leveraging the equity in an owned home is a common way to pay for an ADU. There are two types of home equity financing.
Home equity line of credit (HELOC)
This is a revolving line of credit, typically at a variable interest rate. A lender approves credit up to a certain amount (usually up to 80 percent of the value of your primary home), and then you can borrow from that to pay for your unit and any related costs. You can sometimes find HELOCs without fees or closing costs, but HELOCs in general are less available today than in the past; many banks have stopped offering them in many situations.
Home equity loan (aka second mortgage)
This is a loan for a fixed amount, for a term typically shorter than the first mortgage. As with a first mortgage, you’ll have to pay closing costs and fees such as for an appraisal, credit report, and more; but your first mortgage and its rate stay intact.
3. Borrowing from family or friends
If your loved ones have money to spare, or perhaps just better credit than you do, consider tapping into their goodwill by working out a loan. Pros: The repayment terms can be whatever you both decide, and you’ll be dealing with someone who cares about you personally. Cons: The lender might lord it over you every chance they get, it might change your relationship even if you follow the terms to a T, and if you default…well, let’s not go there.
4. Cash savings, including retirement accounts
If you have enough cash in a regular savings account, you can consider using it to pay for your accessory dwelling unit. No interest, no loan paperwork, no bank to bug you about repayment.
You may also have an option to borrow from your retirement fund, such as an IRA or a 401(k), which often comes with certain restrictions.
5. Personal loan or line of credit
You may also want to consider getting a personal loan or line of credit from a bank or credit union, or drawing on a credit card.
6. Private-money loans
Private-money lending, or hard-money lending, can be a good fit for real estate investors or multifamily-property owners. These loans, which are given by an organization or a wealthy individual, require rental income streams to support paybacks and property valuations, and are often designed for a short-term bridge or construction period. The interest rates are often higher, but the terms are often discretionary, to allow for creativity and flexibility in their structure as well as simpler, faster underwriting and approvals.
7. Government assistance
Both the federal government and local agencies offer financial help for ADU buyers either directly or indirectly.
California only
There are many state grants and other financial incentives for ADU buyers in California, including the CalHome Program, Local Early Action Planning (LEAP) grants, and the Local Housing Trust Fund (LHTF) Program. Many of these stem from ADU funding laws that went into effect January 1, 2021, so if you looked before and didn’t find anything, look again!
All States
The U.S. Department of Housing and Urban Development (HUD) has a housing choice voucher program, which guarantees market-rate rental income by paying the difference between what a low-income renter could afford and the market rate. While this doesn’t directly help pay for ADU construction, it does reduce the risk in taking out a loan to build an ADU. And the U.S. Department of Justice offers financial benefits and protections to service members and others—including dependents and loan cosigners in some cases—via the Servicemembers Civil Relief Act.
Every state also has housing finance agencies created to meet affordable-housing needs. Assistance programs vary, so contact your local agency directly.
The information provided here is not intended to and does not constitute financial advice. The information, content, and materials are provided for general informational purposes only. No reader, user, or browser of this site should act or refrain from acting on the basis of information on this site without first seeking financial advice from a certified financial advisor in the relevant jurisdiction. Villa expressly disclaims all claims and liability that may be based upon or related to the information provided herein. Information and/or dates are subject to change without notice.
