What Loans Work for an Accessory Dwelling Unit (ADU) or Guest House?
Thinking of adding/converting a dwelling or living space on your residential property for a relative or as an investment? A guest house rental loan may be exactly what you need. Maybe it's time you looked into our home improvement loans for an Accessory Dwelling Unit (ADU).
An ADU is a secondary smaller dwelling sharing the same ground (or attached to) a larger regular single-family home with its own kitchen and bathroom.
Home Renovation Loan for ADU/Guest House Overview
Home Renovation Loan Benefits for an ADU or Guest House
If you're looking to add a guest house rental or an ADU to your property or structure or convert a garage, an ADU renovation home loan offers some key benefits:
- Financing allows you to combine your renovation costs into a single mortgage loan with one closing
- Work gets done after the close of escrow on a purchase
- Contractor knows there are funds to complete the project
- Low equity needed to do a project
- Finance options available on an ADU single-family residence
Home Renovation Loan Requirements for an ADU or Guest House
Standard FHA 203k home renovation loan: There is no maximum repair limit as long as the entire loan is below FHA's maximum loan amount for the region. The minimum allowable loan amount for improvements is $5,000.
- Can finance most repairs: additions, add units and ADUs, kitchen remodels including moving the walls, etc.
- A HUD-approved 203k consultant will supervise the project from estimate to completion
Eligible Scope of Work
- Structural work – Additions (must be attached to the existing foundation), add units, and the remodels requiring architectural drawings and plan approval
- Desired improvements
Ineligible Scope of Work
- Luxury items including tennis courts, gazebos, bathhouses, murals, satellite dishes, new swimming pools, outdoor fireplaces/BBQs, etc.
- Additions commercial in nature (home office, commercial workshop, etc.)
Limited FHA 203k home renovation loan: Provides up to $35,000 for less extensive repairs, upgrades and improvements. There are no minimum cost requirements.
Eligible scope of work
- Repair/Replace – Roof, gutters, downspouts, HVAC, plumbing and electrical (if they do not require structural changes), flooring, exterior decks, wells and septic
- Minor remodels – Kitchens and bathrooms
- Cosmetic – Painting & appliance
- Weatherization – Windows, doors, insulation, weather stripping, basement waterproofing, basement finishing
Fannie Mae Homestyle renovation loan
- Conventional FNMA loan with same qualifying and underwriting
- No restrictions on the repairs as long as they are permanently affixed and add value to the property
- Luxury items, pools, fences, and landscaping are allowed
Home Renovation Loan Options for an ADU or Guest House Rental
Limited 203k: The Limited 203k loan is intended for less expensive projects that don't involve structural improvements. It has a maximum repair limit of $35,000.
Standard 203k: The traditional 203k loan has a minimum requirement of $5,000 in renovation costs and covers structural repairs with projects requiring permits. There is no maximum repair limit as long as the entire loan is below FHA's maximum loan amount for the region.
The 203k loan is available as a fixed rate mortgage. Since there are different variables with each of these loans, it's always a good idea to consult a 203k loan specialist regarding your specific housing situation.
The Fannie Mae HomeStyle renovation loan: While these mortgages cannot be used to tear down and reconstruct a home, there are no restrictions on the types of improvements. With this flexible option, you can finance soft costs (architectural services, engineering, permit fees, etc.). In addition, primary, vacation, and rental properties are accepted, and down payments are as low as 3% down payment (vs. 3.5% for a 203k loan).
Ready to get started with a home renovation or guest house rental loan? Contact us today and we can discuss your situation and find the right loan to fit your financial needs.