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In most markets, financing the construction of ADU’s is notoriously difficult. When constructing an ADU, you need to have all the cash upfront to pay a contractor for the cost of construction. This proves to be a tremendous barrier for many people since ADUs can cost between $40K-$200K to build.
In contrast, when purchasing a new home, you may need as little as a 3.5% down payment using a conventional FHA loan. This means that you would need only $10K cash in hand to purchase a $300K home.
Here’s some reasons why it’s historically been so difficult to get a loan for constructing an ADU:
This domino-like set of circumstances amounts to this: If you want to build a permitted ADU, it’s nearly impossible to access capital from banks.
…well, at least that’s been the case up till now.
This is why I am happy to shine a spotlight on one local credit union in Portland that offers a loan product that DOES help individuals who wish to construct an ADU. The new flier below spells out how their rehab mortgage loan product can be used to build an ADU.
Advantis Credit Union, which serves residents of Oregon and Washington, offers this loan product as a pathway for those who wish add an ADU to their existing property, or to purchase a property AND construct an ADU.
As with any bank product, there are some strings attached. For example, you must construct the ADU within six months of receiving loan approval. But, on the whole, this is a fantastic loan product for homeowners who need help overcoming the daunting capital hurdle that ADU construction presents. And at roughly a half point higher than their 30 year loan rates, the current rehab loan interest rates are very competitive (~4.15%, as of January 26th, 2013).In cities that allow ADUs, local banks and credit unions are more likely than national banks to understand the market value of ADUs, and thus, they are more likely to have loan products that help homeowners build an ADU on their property.
Since financing ADUs has been historically difficult, it’s wonderful to see local banks like Advantis Credit Union recognizing this gap and filling it for their local clientele. You can read more about Advantis Rehab Loan product on their website.
This is great to see happening, thanks for sharing! Trouble I see is a few things. Firstly, a 15 year loan at over 4% is likely not affordable, especially if it requires 10-10% down. If they offered a say, 20 yr and 30 yr options… with lower interest the lower the term (3% 20 yr, 2% 15 yr, the 4% for the one mentioned) then it will be doable. For most, especially folks under water needed to pay the difference in losses PLUS that down payment needed? Not feasible.
Sorry, it can be hard to use my iphone at times. Here is what I “MEANT” to say, with some added thoughts. 😉
This is great to see happening, thanks for sharing! Trouble I see is a few things. Firstly, a 15 year loan at over 4% is likely not affordable, especially if it requires 10-20% down. If they offered say, 20 yr and 30 yr options… with lower interest, the lower the term (i.e. 3% 20 yr, 2% 15 yr, the 4% for the 30 yr) then it will be (more) doable. It might work for folks who had a sudden jump in income, or, someone who has significant equity in a home so they could afford a 15 year at over 4%. Those lucky folks that bought before the boom, for instance. Currently there is 3.5% Interest for a standard Fixed 30 yr… so it’s competitive, but mostly because of the ADU product portion only (the interest rate is average). For most, especially folks under water needing to pay the difference in losses, PLUS that down payment needed to get into this product? Not feasible. I am certainly checking out this loan to see if they offer a 25 or 30 yr and that there is not a 10-20% down. Otherwise, it would cost less and be far more accessible, to simply keep a loan we can afford monthly, and just have an ADU built with cash and credit to rent out. Good to see banks creating more options, even if the terms are not doable for those without significant equity.
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Do you know of similar programs in Northern California?
Marilyn, yes I do. Try Umpqua and Guaranteed Rate. They both serve CA and can do ADU renovation financing for ADUs.