Financing for the construction of an ADU is usually achieved through a combination of resources including savings, grants, second mortgages and/or Home equity lines of credit. All of the resources are different and can provide different benefits.
Your ability to secure certain financing tools for the construction of an ADU may depend on income, credit score, existing debts, home equity, location and the value your ADU adds to your property.
Savings/Cash on Hand
Most homeowners leverage some savings or cash on hand for the financing of their ADU. This type of cash can include general savings accounts at your banking institution, cash contributions from family and friends, or money pulled from a 401k as a loan to yourself and usually paid back within five years. For many, paying for the construction of an ADU in cash is not feasible thus requiring different layers of financing/sources of money.
A second mortgage sits on top of your existing mortgage and is paid back simultaneously. You can obtain a second mortgage from a bank or a mortgage broker. There are certain advantages to getting a second loan rather than refinancing. If your first mortgage/primary loan rate is low, you may not want to refinance and possibly lose that current rate on your primar loan. Loan fee on a second mortgage may be less then refinancing the funds are more flexible.
Cash Out Refinance
A cash out refinance is when a homeowner refinances their current home mortgage and pulls out cash from the equity in their home. By doing this, the primary loan amount will increase allowing you to increase your home value by building the ADU. The loan fees tend to be lower than HELOC, construction or private loan but you will be required to refinance and obtain a new rate and loan term once the construction is complete.
Home Equity Line of Credit (HELOC)
The Home Equity Line of Credit is pulling a line of credit based upon the equity in your home. The homeowner first qualifies for a certain amount based on the equity in the home and draws down money when only payments are due to the ADU builder. The borrower/homeowner only pays interest and payments to the bank when the HELOC is used. The home has to have enough equity to cover the cost of the ADU and extra to serve as a safety margin.
From: The Casita Coalition- ADU Finance Guide for Homeowners
CalHFA ADU Financing Program
For income qualified homeowners only, this grant opportunity provides up to $40,000 for pre-development work which includes site prep, architectural design, permits, soil test, impact fees, property survey, and energy reports. Income Qualifications
The 2022 Government & Conventional Income limits for San Bernardino County: $173,000
The Limits are updated annually. For most up to date limits go to the CalHFA’s website
Homeowners must work with a pre-approved lender who will underwrite the construction loan for the ADU and submit the ADU grant application to CalHFA. All grant program lenders can be found online. CalHFA ADU infographic steps are helpful for understanding the process.
How does it all come together?
- Homeowners leverage one or two of the financing options listed above (Cash on hand, Cash out Refinance, Second Mortgage, and HELOC). Upon the start of the project, loan officers submit applications with qualified expenses for reimbursements up to 40k. Check out CalHFA’s helpful infographic.