How To Finance An ADU When You Don't Have Home Equity

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What if you don't have enough home equity to finance your ADU build? Luckily there are several financing options that do not require you to use any existing home equity. These loans for building an accessory dwelling unit fall into two categories: renovation and new construction. Renovation loans can be used to pay for the conversion of an existing structure like a garage, basement, or attic into an ADU, even if it's detached from the main house. A new construction loan is used to finance the building of a brand new ADU from the ground up such as a backyard ADU that requires a new foundation to be poured. All these financing options require the purchase or refinance of a main home in order to build an ADU. The options include the Fannie Mae Homestyle Loan, the FHA 203(k) Rehab loan, the Freddie Mac ChoiceRenovation loan, all-in-one construction and construction to permanent loans. The loan terms including the minimum down payment, max loan to value ratio, and closing costs will vary lender to lender so make sure to shop around. Some of the downsides of renovation and new construction loans for ADUs include the fact that it is generally harder to get approved versus home equity loans and cash out refinances, ADU appraisals can be too low, closing costs are higher than equity loans and there is a minimum down payment.

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