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Lay Explanation of Conventional ADU Financing Options

Financing is, by far, the biggest barrier for most homeowners seeking to build an ADU on their property. Recently, I was trying to gain some clarification about three conventional loan products that can be used to help fund the construction of an ADU:

  • First Mortgage Cash Out Refinance
    • taking out extra money when refinancing your ‘first mortgage’ .
  • 2nd Mortgage – Fixed or Home Equity Line of Credit 
    • when you have at least 20% equity built up in the property.
  • Renovation Financing

Generally, these three conventional loan options are what you may use if you don’t have sufficient cash to fund an ADU outright. If that’s you, and you’re confused about which type of loan options you can use, here’s three common scenarios that can use to help you figure out which type of conventional loan may be most appropriate for you to consider:

1) Let’s assume that someone is gainfully employed, has tons of equity on their house, lives in a house, and wants to build a detached ADU on that property. For this individual, which financing tool would be the most advantageous to use? 

Assuming they don’t have the funding to complete the ADU and they can take out enough cash out from a first mortgage or 2nd mortgage not based on after rehab value, then a cash out first mortgage or 2nd mortgage could be used.  Which one would be better would (first and second mortgage) depends on the terms of the existing first mortgage.

2) For someone with little or no income, but with the same other factors at play, then what option is best? 

There may be no option as qualifying for a primary residence (even with a proposed ADU) your income still needs to be commensurate with the loan size.  However if they are buying or refinancing the property as non-owner then they would need less income to qualify since you can use rental credits to qualify.

3) What about for someone who is employed, but without any significant equity in their existing property? 

This is more straightforward as without material equity then you need renovation financing because it is the only loan that will base the equity requirements on after rehab value.

So for example if you only had 15% equity currently on a $400K home ($340K loan amount), and the maximum cash out you could take is up to 90% loan to value on all normal loan products, there is no material proceeds to fund an ADU (would only give you 5% cash out based on current value or $20K, not enough to fund an ADU).

However if a proposed ADU added say $75K of value and the fact that it allows up to 95% loan to value financing based on after rehab value, that means you would have approximately $70K of renovation funds to build your ADU. That’s because the Multnomah County loan limit is $417K.

So its after rehab value ($400K current value + $75K after rehab value) x 95% max loan to value for rehab financing = $451K. But, this is reduced to $417K max loan value per County loan limits.  $417K minus current balance of $340K gives about $70K renovations (including rounding to account for renovation financing fees).

For further clarification of these three conventional loan types, we’ve built  a reference spreadsheet that compares and contrasts each of these three options based on the factors are at play to qualify for the type of loan:

  • qualifying factors
  • drawbacks
  • who this loan best serves
  • difficulty of using this loan type
conventional financing options

conventional financing options


This information for this post was drawn from an email conversion with Vince Kingston. You can contact Vince if you’re interested in one of these loan options to help you finance the construction of an ADU.

Vince Kingston

Mortgage Advisor

Eagle Home Mortgage

NMLS # 291740

971-221-8525 direct

About Kol Peterson

Kol is an ADU consultant, advocate and author of Backdoor Revolution: The Definitive Guide to ADU Development. Read more here: and learn about building your own at Email at

5 comments on “Lay Explanation of Conventional ADU Financing Options

  1. Mark Wheeler
    June 28, 2015

    Thanks for this great info. Vince is a good lender. Clarification: it is not the County that limits loan amounts. It is a federal level FNMA limit on conventional loan amounts based on housing costs in various areas of the country. For Multnomah County, that limit is currently $417k. You can borrow more than that if you qualify for a jumbo mortgage, which typically has higher costs. Or structure the loan as a 1st + 2nd mortgage (90/10/10 or similar). Thank you.

  2. reocel
    August 1, 2015


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    January 31, 2016

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This entry was posted on June 27, 2015 by in Financing and tagged .
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