FINANCING
How to Finance a JADU, Back House, or Granny Flat in Los Angeles
What financing options are available for building an ADU?
Once you have settled on a budget for your ADU, in-law flat, or JADU, it’s time to consider how you will finance the construction process. Financing is one of the most crucial hurdles to clear before you can build an ADU to house family, generate rental income, and/or add value to your property.
Some of the most common paths to ADU financing include:
● Cash-Out Refinance or Home Equity Line of Credit — for homeowners who have equity in their house.
● Homestyle Renovation Loan — for homeowners with little or no equity in their house
and homes valued less than $550,000. These loans can be made against the future
value of the home up to $753,000 for all loans (i.e. including any mortgages or lines of
credit that might already be in place against the property).
● 2nd Position Construction Loan — for homeowners with little or no equity and FICO scores of 720 or above. Below we describe these options in detail, as well as several other paths to financing that may be available to you for ADU development in the greater Los Angeles area.
At GoADU, we have extensive experience with all of these financing options, as well as working
relationships with several lenders. We can help you choose the right financing option for you
and your project, and act as helpers in the process.
How do I compare my options for ADU financing?
GoADU has prepared an ADU financing calculator that lets you compare different loan options for your back house or granny flat, including cash-out refis, HELOCs, construction loans, and more. We make it easy to include estimated ADU costs and your home’s approximate value to crunch the numbers and determine which plans you are eligible for and will offer the best terms. When it’s time to shop for financing, we can help pair you with lenders we have worked with successfully to make our clients’ ADU vision a reality!
Plans and Pricing for Los Angeles ADUs
We know price matters, and we strive to be transparent and honest about what it will take to
have the ADU of your dreams on your property and secure the best financing possible. Check
out some of our catalog of floor plans, along with price estimates, and feel free to reach out to
us with feedback and questions — it’s never too early to start the conversation and dig into the
possibilities with GoADU!
Best Financing Options for ADUs in Los Angeles
Home Equity Line of Credit (HELOC)
For homeowners with substantial equity, a HELOC (home equity line of credit) may be the simplest solution. Most lenders are comfortable with homeowners having 80 90% LTV (loan-to- value) against their home. If an appraiser determines that the value of your home is such that
your LTV is less than 80-90%, they may issue a HELOC to bring you up to that magic number. You can then borrow as much money as you want against that HELOC, up to the credit limit, to finance your ADU construction project.
Cash-Out Refinance
Homeowners with equity may prefer a cash-out refinance to a HELOC. The conditions of a
cash-out refi are similar, except the loan will replace the existing mortgage and be repaid in installments, whereas a HELOC is a revolving line of credit like a credit card. If your house appraises at $1 million and you only have a $500,000 loan outstanding, you could refinance to a $750,000 loan (below the 80% LTV threshold), pay off the first loan, and keep the $250,000
difference to build your ADU.
Renovation Loan
An ADU is considered a “renovation” that will qualify the homeowner for one of two standardized renovation loan programs — one through Fannie Mae (known as “Fannie Mae Homestyle”), and
one through FHA 203K. Homeowners may borrow up to 95% of the future value of the house as determined by the expected value-add component of the ADU. (85% for investors.) They may borrow up to a future value of $753,000, maximum, to conform with these loan programs, which places them in the feasibility threshold for homes that have a present value of about $550,000
or less. If you have a home of that value and little equity, a conforming renovation loan may be the way to go.
Construction Loan
If your project falls outside the conforming loan value for a Fannie Mae or FHA renovation loan, the next best option may be a construction loan. A construction loan can be used to pay for the construction costs of an ADU, and then roll over into an adjustable rate mortgage. These loans are usually junior (second position) to your primary mortgage. Available balances start at $150,000. Payments are interest-only, and no interest is actually due until you actually receive funds. Funds may be released on a “disbursal” schedule based on construction milestones.
Purchase and Construction Loan
If you are purchasing a new property and want to add an ADU right away, a purchase-and- construction loan may be a good option. If you expect the home value to be $753,000 or less, a Fannie Mae Homestyle or FHA 203K renovation loan may be appropriate. If not, a purchase- and-construction loan similar to new home developments may be used. A purchase-and- construction jumbo loan may be needed for particularly high valuations.
Home Equity Conversion Mortgage (HECM)
Homeowners 62 years of age and older may be eligible for a HECM (Home Equity Conversion Mortgage) against their primary residence. A HECM is a kind of reverse mortgage insured by
the Federal government. Any existing mortgage must be paid off, but the difference can be used for any purpose the borrower wants, including building an ADU. Borrowers can access 43% LTV
at 62 years of age or older, 70% LTV at 86 years of age or older.
Find out what Los Angeles ADU financing option makes the most sense for
you.
How do I compare my options for ADU financing?
GoADU has prepared an ADU financing calculator that lets you compare different loan options for your back house or granny flat, including cash-out refis, HELOCs, construction loans, and more. We make it easy to include estimated ADU costs and your home’s approximate value to crunch the numbers and determine which plans you are eligible for and will offer the best terms. When it’s time to shop for financing, we can help pair you with lenders we have worked with successfully to make our clients’ ADU vision a reality!
Plans and Pricing for Los Angeles ADUs
We know price matters, and we strive to be transparent and honest about what it will take to have the ADU of your dreams on your property and secure the best financing possible. Check out some of our catalog of floor plans, along with price estimates, and feel free to reach out to us with feedback and questions — it’s never too early to start the conversation and dig into the possibilities with GoADU!
Partnering with Go ADU is the best choice you can make for your finances. Not only does our experience translate to the highest quality craftsmanship but it also ensures that you get the financing that’s right for you. Get more insights into the process by connecting with Go ADU today!
