What is an ADU Loan?
Thinking of constructing dwelling units or converting a living space on your residential property for a relative or to use as an investment? A guest house rental loan could be exactly what you need. Maybe it's time you looked into a Cash-Out Refinance loan for anAccessory Dwelling Unit (ADU).
An ADU is known by many different names, such as granny flat, in-law unit, guest house, tiny house, backyard cottage, laneway house, carriage house, casita, or secondary dwelling unit. The diversity of types of ADUs provide many opportunities to borrowers. Every type shares a common theme: an ADU is a secondary smaller dwelling that is constructed on the same ground as (or attached to) a larger regular single-family home with its own kitchen and bathroom. An ADU is now permitted on 2-unit and 3-unit properties as well.
ADU Financing
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Investing in your home with the addition of an ADU can take your already valuable property and potentially increase its value.
A Cash-Out Refinance is a resource designed to tap into your home’s equity (if it has increased in value over time through monthly payments made) and increasing the amount that you are borrowing by taking out the cash difference.
When a mortgage refinance is used to provide a lump sum of cash, you can use the cash to finance your home addition or help you renovate. Your current mortgage will be retired as you take out a new one, possibly with different terms, and for an amount that is larger than what you currently owe.
Then, the excess funds after paying off your old loan’s outstanding balance and closing costs arepaid out to you in cashat closing. A Cash-Out Refinance can have afixed interest rate, so you could have a fixed mortgage payment for the life of the loan.
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ADU Loan Options for Accessory Dwelling Unit or Guest House Rental
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What loan types are eligible for a Cash-Out Refinance?
The answer is all types, includingConventional,Jumbo,FHA,VA, and Home Equity Lines of Credit -check with a Loan Officer for your personal consultation.
Benefits of Having an ADU on Your Property
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- As a landlord, an ADU can provide the advantages of another stream of income while expanding affordable housing options in the area. This additional income is ideal especially for those who need to build or catch up on their retirement savings.
- With a low environmental footprint, ADUs generally keep the characteristics of a neighborhood intact, while encouraging multigenerational living and aging in place.
- An ADU has a wide range of appeal, particularly among families caring for an elderly relative or in need of an affordable guest house, exercise room/home office. It can also provide affordable housing to adult children who may be feeling the crunch of a particular region’s tighter housing market and wanting/needing to live at home.
- Compared to apartments, detached ADUs often command a premium rate for rent. However, for renters not wanting to pay an elevated price to rent a home, an ADU can more easily accommodate their budgets, especially if they’re single residents not needing a lot of space.
- ADUs can increase property value, especially in areas where housing is at a premium.
ADU Loan Benefits
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If you're looking to add a guest house rental or an ADU to your property or structure, or convert a garage, an ADU home loan offers some key benefits:
- Combine your renovation costs into a single mortgageloan with one closing
- Work gets done after the close of escrow on a purchase
- Contractor and builders know there are funds to complete the project
- Low equity needed to do a project
- Finance options available
Cash-Out Refinance Requirements
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What is needed for a Cash-Out Refinance?
In general, you'll need to meet minimum credit score requirements for the new loan and have enough equity in your home for the refinance. You will need to have enough money to cover the service fees and closing costs of your new loan. Your lender may require a home appraisal. Each lender will also have their own individual requirements that applicants must meet for approval.
ADU Loan FAQs
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What is an ADU loan program?
Once you’ve decided you’re interested in adding an ADU to your existing property, you’re ready to look for traditional options available for financing an ADU. These loans are typically based upon the amount of equity you have built up in your home, as well as your household income, savings, and credit.
What does ADU stand for?
ADUs have been known by many different names, but the actual anagram ADU stands for Accessory Dwelling Unit.
Can you finance an ADU?
Yes, an ADU can be easily financed. Consult with a Loan Officer for more information.
Can a VA loan be used for an ADU?
Cash-out refinancing may be a viable lending option for homeowners who qualify for a VA loan and are looking to finance an ADU. The VA will guarantee these loans up to 100% of the home’s value. VA loans are also not subject to down payment limits or private mortgage insurance (PMI).
Ready to get started with your ADU loan? Contact us today and we can discuss your situation to find the right loan for your financial needs. You can also check out the current mortgage rates here.
ADUs are just one of many financing options available for borrowers to finance their homes or projects. The Loan Officers at New American Funding will be happy to discuss your individual needs and find a loan that fits you.
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