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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

Accessory Dwelling Unit | ADU Loan | small house additionYou may have heard of an ADU by a different name such as a granny flat, in-law unit, guest house, tiny house, backyard cottage, laneway house, carriage house, casita or secondary dwelling unit.

With an FHA 203k renovation loan, you can convert or add on to an existing structure into an ADU and build additions as well as bring non-compliant additions up to code. You can even make home improvements to the primary home on the property at the same time as adding the ADU with no maximum repair limit as long as the entire loan is below FHA's maximum loan amount for the region.

This type of loan is backed by the Federal Housing Administration (FHA), but you don't need to have an FHA home loan to qualify for an FHA 203k refinance loan.

If you need to refinance your home mortgage, the FHA 203k refinance loan allows current homeowners the opportunity to rehabilitate and improve their home. Whether it's for making a home handicapped-accessible, replacing your roof or upgrading your kitchen, home improvement projects can raise the value of the property and allow you to customize as your needs change. The FHA 203k Refinance Loan allows you up to $35,000 for your home improvement project.

Fannie Mae (FNMA) Homestyle® renovation loans are used to rehabilitate and renovate properties. This can fund the building of a detached structure such as an ADU and also fix up the primary residence on the property. These loans can be used for investment properties as well. (However, short-term fix and flip investing is prohibited.)

In addition, the mortgage loan amount may not exceed Fannie Mae's maximum allowable amount for a conventional first mortgage. (Consult Fannie Mae's website for the most current allowable amounts.)

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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

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Home Renovation Loan Requirements for an ADU or Guest House

FHA 203k loans follow the eligibility guidelines of the standard FHA mortgage, so it's best to ask a loan consultant about qualifying.

Highlights

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 Retnal

The following loan options are available as purchase or refinance loans and as 15- or 30-year fixed-rate mortgage:

  • 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.

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