A Beginner’s Guide to ADU Financing
Thinking about building an ADU (Accessory Dwelling Unit) in Coeur D’Alene, but not sure where to start with financing? We spoke with Steven Pack from Barrett Financial to break down the basics and make the process easier to understand.
What kinds of loans can I use for an ADU?
There are several options for financing your ADU, each with its own benefits and drawbacks. Construction loans provide short-term funding that converts into a long-term mortgage after the build is complete. Renovation loans are ideal if you’re modifying an existing structure like a garage or basement. HELOCs (Home Equity Lines of Credit) let you borrow against your home’s equity, offering flexibility but requiring financial discipline. Cash-out refinancing allows you to replace your current mortgage with a larger one, pulling out extra cash for your ADU project.
How is a HELOC different from a construction loan?
A HELOC functions like a credit card, allowing you to draw funds as needed from your home’s equity. It’s a flexible option but requires careful management, as interest rates can fluctuate. In contrast, a construction loan is specifically designed for building projects, providing funds in stages as construction progresses. Once the ADU is complete, the loan typically converts into a standard mortgage with a fixed repayment plan.
When do I start making payments?
This depends on the type of loan you choose. With a HELOC, you only make payments on the amount you’ve borrowed, and the repayment terms can vary. For construction loans, payments often begin as soon as you start using the funds, typically covering interest-only during construction. Once the ADU is complete, the loan transitions into a regular mortgage with full principal and interest payments.
What do lenders look for when approving an ADU loan?
Lenders will assess your credit score, income stability, and debt-to-income ratio to determine if you qualify. They’ll also evaluate your property’s value and ensure it meets zoning and building regulations. If you’re using a construction loan, they’ll want to see detailed plans and an estimated budget to confirm the project’s viability.
Does my property qualify for an ADU?
Before moving forward, check local zoning laws to see if your property meets the requirements for an ADU. Key factors include lot size, setbacks, height restrictions, and utility access. Some areas also have owner-occupancy requirements or rental restrictions, so it’s essential to verify with your city’s planning department.
Can I finance a garage conversion or basement ADU?
Yes! If you already have a structure in place, renovation loans or HELOCs can help you finance the conversion. These options can be more cost-effective than building a new ADU from scratch since you’re working within an existing footprint.
Should I use a HELOC or a construction loan for renovations?
The best choice depends on your financial situation. A HELOC offers flexibility and quick access to funds, but since it’s tied to your home’s equity, it carries some risk if property values drop. Construction loans come with built-in oversight, ensuring funds are used appropriately, but they may have stricter qualification requirements.
Can my contractor help with budgeting?
Absolutely! Working with an experienced contractor is crucial for setting a realistic budget. Steven recommends building a 10-20% contingency buffer to cover unexpected costs. “Surprises happen in construction,” he says, “so having extra funds set aside ensures your project stays on track.”
How do construction loans protect me?
Construction loans include safeguards to make sure your project is completed as planned. Lenders require permits and inspections at key milestones before releasing funds. This process helps ensure that the work meets code requirements and that contractors are paid appropriately for completed work.
What’s the most important step in ADU financing?
Steven’s advice: “Talk to your lender and contractor early. Understanding your budget and loan options from the start will save you time, money, and stress.” Planning ahead ensures you choose the right financing option, avoid costly mistakes, and set realistic expectations for your project.
Starting an ADU project can be overwhelming, but with the right information and team, it can also be a smooth and rewarding process! If you have questions about building an ADU or need expert guidance, contact Aesir Construction. Our team can help you navigate the process from design to completion, ensuring your project stays on time and within budget.
If you would like to get started on financing or have more questions about the right lending options for you and your property, contact Steven Pack NMLS #1773444, spack@barrettfinancial.com.
