San Diego ADU Financing
The majority of homeowners and investors will take out a loan to build their granny flat. OneStop ADU has teamed up with some of the top lenders in San Diego that will match you with the best loan programs currently available. We have years of experience working with these vetted lenders and are confident that they will offer you the best options to suit your financial needs. OneStop ADU’s A to Z package includes having one of our approved lenders ensure that you have all the required documents to submit for loan underwriting.
We have outlined the best options below to finance the construction of your new companion dwelling
A cash-out refinance will replace your current home loan with a new mortgage for more than the current amount owed. In order to qualify for this type of loan, you need to have more equity than your present loan amount. Limits usually apply as to what percentage of your home’s value can be financed, typically 80% LTV. The difference goes to you in cash which can be used towards the construction of your new companion unit. The benefit of this type of loan is that rates can be fixed, interest is typically lower for primary loans, and you receive a tax deduction.
For example: Your home is worth $800K and you currently owe $450K, you could probably get a new loan of approximately $640K with a cash-out opportunity of $190K.
Home Equity Line of Credit (HELOC)
A home equity line of credit, sometimes referred to as a “second mortgage”, is an alternate way to finance your ADU construction. The benefit of a HELOC is that you can withdraw funds from your line of credit as needed, and interest is only paid on the amount taken. Some of the drawbacks are that interest rates tend to be higher than primary mortgages, rates are always variable, and the interest is not tax deductible.
For example: Primary homes usually have an 80% LTV. If your home is appraised at $800K and your current loan is $450K, you could likely get a HELOC of $190K ($800K*0.80= $640K-$450K=$190K).
(Fannie Mae Homestyle)
Renovation loans are a type of construction loan that allows homeowners to finance their project based on future appraised value. This type of loan is beneficial if you do not have equity in your current home. It usually takes 60-90 days to fund a renovation loan due to the collaboration required between the lender, homeowner, contractor, and HUD inspector. The post construction value of the property is determined by the appraiser using the design and contractor bids and appraisal of the existing dwelling. The lender must then work with a HUD inspector who will oversee the work and pay the contractor as per the payment schedule. The bank does not give the funds outright to the homeowner. The Fannie Mae Homestyle loan has a conforming limit of $879,750 for one unit and $1,126,250 for two units in 2022. The types of loans typically have higher interest rates and often are refinanced at the end of the project.
Home Equity Conversion Mortgage (HECM, ages 62+)
A home equity conversion mortgage is better known as a “reverse mortgage”. In order to qualify, one of the homeowners must be 62 or older, the property must be your primary residence and you must have significant equity in the home. The owner takes equity out of their home and can use those funds to finance their granny flat construction. Disbursements are usually monthly, given as a line of credit without fund control or a combination of both. The homeowner can borrow up to 42% of the home’s value at age 62, up to a maximum of 70% at age 86 or more. Third-party financial counseling is mandatory for those willing to take out a HECM loan. Some of the benefits of a “reverse mortgage” are interest rates are not based on credit score and history and there is no minimum monthly payment. HECM loans are no recourse FHA loans and there is no time limit as long as you reside in the home. The maximum appraised value is set annually in November and is used to determine the loan amount. The latest value set in 2021 is $970,800.
A construction loan is yet another option for financing your ADU if you lack equity in your home or have an LTV close to the conforming limit. These are usually temporary loans used to finance a build. Once construction is complete, you can refinance into a single loan that includes the primary dwelling. Loan amounts are usually $150,000 or more, cover all construction costs, and carry interest-only payments. These types of loans tend to be more complex in particular for small loan sizes.
*This is for informational purposes only. Our lender matching program does not constitute and guarantees, warranties or promises regarding the outcome of your financing.
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