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Financing your ADU has become easier.
I am sure that when someone mentions financing, or budgeting, or anything to do with numbers for a project there is a slight shudder of angst. When building an ADU there are many facets to getting started but ultimately you need to know if you can financially build the project first. As you don’t want to put the cart before the horse and get excited about the design and layout of your new project without funding. It’s easy to get excited about your new project but backing that cart up can be tricky if you don’t lay out your monetary plans first.
Any qualified borrower can buy and finance the purchase plus the money for improvements. Qualification is generally based on the lower of the sales price plus repairs or the improved value of the property. All standard FHA or Conventional loans; income, credit and documentation criteria applies.
In the case of building an ADU with an FHA 203k or Conventional Homestyle renovation loan, the financing is as simple as combining your ADU project and home with a refinance or purchase into a single mortgage loan. There’s just one loan, application, set of fees, closing, and monthly payment. When you take ownership or finish the refinance of the home and ADU at closing, the repair money is put into a special account for future disbursement as the improvements are completed.
A Renovation Loan is based on the increased property value after renovation. Plus, the required down payment can be as low as 3.5%. Interest rates are historically low and improvement costs can be stretched over the loan term. This can really save you compared to most improvements paid for with more expensive consumer credit. You may also finance up to six months of mortgage payments if the house is uninhabitable during construction. Check out these comparisons on renovation loans.
Key Steps for you to close your loan in a timely manner:
1. Make sure your prequalification is for a product that will close as is and is structured on the necessary loan amount not just the sales price. Make sure you are dealing with a Renovation Lending Specialist who is experienced specifically in renovation loans and can discuss all the features, benefits, terms and conditions with you.
a. Verify you have considered a reasonable cost of renovations
2. Investigate the property condition and after improved value with your Real Estate Professionals if purchasing. Or with a refinance acknowledge the repairs or updates that will make this ADU your desired finished product.
a. Cost to Cure, BPO, Appraisal
b. Contractor estimate
3. Look for a Contractor who licensed, insured and capable to do the work.
a. Ask for referrals from your Real Estate Professionals, friends and family.
b. Contact your local Home Builders and Remodeling Organizations.
4. Estimate the After improved value to be sure the values work. You can speak with your contractor and 203k HUD Consultant about this.
a. Sales Price + Improvements < After Improved Value*
5. Prepare for the Contractor Package required by lender.
a. License, Liability Insurance, Workman’s Comp
b. Home Owner Contractor Agreement (HOCA) and detailed bid.
*For FHA Loan amount = lower of [(sales price + improvements) x 96.5%] or 110% of after improved value.
A typical renovation loan will take up to 45 days to complete. Given that the bids are submitted in a timely process. See the Renovation 45 Day Loan Calendar.
In the past Renovation loans were challenging because they were unusual and lenders were not comfortable with the differences. That is not the reality today. Prospect Mortgage has made a decision to focus on the benefits of Renovation Loans and created efficient workflows so that together we can deliver closings on time.
Check out my website to learn more about renovation loan products.
For more information, please contact:
Paul Martinez, Loan Officer
Renovation Loan Specialist