Additional dwelling units have become extremely popular, especially in states like California. Despite their popularity, there still isn’t a loan type that is specific for them. So what do people mean when they say an ADU loan?
Local Government Grants And Programs
To encourage ADU development to combat the housing crisis, many state and local governments have created incentive plans. These plans offer grants specifically for ADU development, as well as programs that help expedite the process.
For example, California created the CalHFA’s ADU grant program that gives homeowners up to $40,000 for ADU pre-construction costs. Los Angeles also launched an initiative that expedites the permitting process by offering pre-approved ADU designs.
Home Equity Loans & HELOCs
Most of the time, when people are talking about an ADU loan, they are referring to a Home Equity Loan or a HELOC. Although not designed for ADUs, they work well for them.
A Home Equity Loan allows you to borrow against the equity of your home as long as you own at least 10-20% of your home. This loan will provide you with a fixed amount of cash with a fixed repayment schedule.
A HELOC is very similar to a home equity loan, except instead of receiving a fixed amount of cash, you receive a revolving line of credit with a shorter repayment term.
Construction Or Renovation Loan
Another very popular option individuals use to finance their ADUs is either a construction or renovation loan. Though both are not created specifically for ADUs they work well for them.
These loans work by getting your property appraised for its current value and its expected increase in value based on your ADU plans. The bank gives you up to 95% of the expected change in value as a loan over a period of time while you construct your ADU.
Banks will usually only disperse the money after an inspector certifies your process. Therefore, you can’t receive money for the next step until the first step is approved by an inspector. As a result, using this loan can make your project take longer to complete.