While most ADUs are currently financed in the old-school manner (a patchwork of cash, home equity, family/friends loans, and sweat equity), there is a general policy movement toward figuring out how to enable lower-income homeowners to also be able to build ADUs.
There are emerging loan products and other financing methods that expand access to ADU construction capital by better reflecting an ADUs’ rental-income-generation potential and the value they add to properties. This is a quickly evolving market that includes regional banks, credit unions, Community Development Financial Institutions (CDFIs), and startups.
Renovation Mortgages (first position)
Two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, offer products that allow homeowners to obtain new or refinanced mortgages based on a property’s value after renovation. At least two national lenders sell these: Guaranteed Rate and Eagle Home Mortgage. In addition to GSE products, certain regional banks, like Umpqua, offer portfolio renovation loans with greater flexibility in loan-to-value (LTV) ratio and/or credit than the GSEs offer.
ADU-Specific Home Equity Line of Credit (second position)
portfolio HELOCs (as well as first mortgages) based on after-completed value
DTI up to 50% (not subject to 43% limit as a smaller lender)
90% LTV for loans up to $200,000, 100% LTV for loans up to $50,000
Prime rate plus 0.5-1%
Point (Has invested in homes in CA, WA, MA)
Homeowners can receive $35,000 to $250,000 for Point co-investment in their home for ten year term. There is a 3% processing fee. When the homeowner exits the contract, her or his buyback cost is the amount originally received plus a portion of your home’s appreciation since partnering. Point’s share in any appreciation is higher than the share of equity is purchased. If the home has appreciated past a certain threshold, Point’s share is capped. If the home has depreciated, Point will share in the loss, but not proportionately. The equity can be repurchased early with no penalty. Point’s interest is not reflected on the title.