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Financing Options

7 Ways to Finance an ADU

At SonderPods, our goal is to make the entire ADU experience as simple as possible — and that includes the financing. Before you look into financing you need to evaluate your existing financial situation and determine how much you owe on your home today compared with how much it is worth.

One question we get quite often is: Can I just get a separate mortgage for the ADU?

Unfortunately, you cannot get a standalone mortgage for your ADU if your ADU and the other home on the property occupy one parcel unit. However, there are a lot of other great options.

Ease of Approval

A Home Equity Line of Credit, also known as a HELOC is a line of credit secured by your home that gives you a revolving credit line to use for large expenses or to consolidate higher-interest rate debt on other loans. The benefits of the HELOC is they are fast and inexpensive to get. The Loan to Value (LTV) ratio can be up to 90%. It often has a small annual fee and is tied to the Prime Rate plus or a minus a margin. The drawback for this type of loan is the rate can adjust monthly due to the Prime Rate and the interest rate cap is very high. However, we expect rates to stay low, so this is not as much of a concern.

A cash-out refinance replaces your existing mortgage with a new home loan for more than you owe on your house, but not more than the house is worth. The difference goes to you in cash which you can spend on your ADU, home improvements or other financial needs. You will receive the best pricing if you don’t go over 75% LTV ratio.

For example, If your home is worth $500,000 and you owe $200,000 and need $135,000 for the ADU. $200K + $135K = $335,000 divided by $500,000 = 67% LTV ratio. This is a good option if you have equity built up in your home. Because your new mortgage will have different terms from your original loan, you’ll want to review your interest rate and fees before you agree to the new terms.

A renovation loan enables homeowners to finance the renovation of a home through a single mortgage. This is a good option if you don’t have enough equity to qualify for a cash-out refinance. The final loan amount is based on the projected value of the home after the ADU is installed, and this adds value to the land and home.

There are additional costs associated with it. For example, you will need to pay for a HUD (Housing and Urban Development) consultant if the renovation costs exceed $150K. The interest rate is typically a quarter or half a percent higher than a cash-out refinance, but it may still be lower than your current loan. One point to note is that it is not the same as a construction loan. We’ll get into that loan type a little later.

A homeowner who is 62 or older and has considerable home equity can borrow against the value of their home and receive funds as a lump sum, fixed monthly payments or line of credit. A reverse mortgage does not require the homeowner to make any loan payments. The homeowner’s credit score does not come into play, but they may have to qualify for property tax, insurance and utilities. These types of loans typically come with a higher interest rate, maybe as much as 2 points higher.

If you have someone in your family or a close friend who you can borrow from then this may be a good way to go. You can set up the loan with an attorney, put a lien on the house and make an agreement to pay them back with a schedule. The main advantage of receiving a loan from a family member or close friend is that your lender is more likely to be flexible with payments arrangements and interest rates. Just make sure you treat a personal loan with the same respect and professionalism as you would a loan from a bank. We want everyone to be happy with the deal.

If you are 59 and a half or older you can withdraw from your retirement account without penalty. If you are younger than 59 and a half, you may be able to borrow from your retirement account. Just be aware that you may have limits to how much you take out and you may have to pay taxes if you don’t repay the loan on time.

A construction loan which is also known as a “self-build loan” is a short term loan used to finance the building of an ADU. The land owner takes out the construction loan to cover the costs of the project before obtaining long-term funding. This type of loan only applies if you have a vacant lot. A check is issued to the land owner and the contractor so they both can sign off on it. The small downside to this type of loan is that you wouldn’t be able to add in some of the ADU protections like an impact fee.

SonderPods Financing provided by:

SonderPods Financing provided by: All loans subject to underwriting approval.
Certain restrictions apply. Call for details. CrossCountry Mortgage, LLC. NMLS3029 (www.nmlsconsumeraccess.org)

Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act.

Failure to pay on your HELOC could damage your credit standing and result in the loss of your home through foreclosure.

To obtain a HECM, you must attend HUD Approved Counseling available at little to no cost and receive a certificate of completion that will be required during the application process. While you won’t make any mortgage payments, you will still be responsible for property taxes and homeowners insurance and upkeep of the property.

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