Six ways to finance an ADU

1

ADU manufacturer financing

In-house financing options can unlock new opportunities for homeowners who may not qualify for traditional financing options or want to take advantage of special rates or terms.

Samara offers transparent financing for our turnkey Backyard ADU. With no payments or interest for six months (followed by a repayment term), APRs as low as 6.5%, and as little as no money down, Samara’s financing removes many common barriers that prevent homeowners from building an ADU. Samara’s financing can even potentially cover the entire ADU project, including installation and closing costs.

2

Cash-out refinance

A cash-out refinance enables homeowners with significant home equity to fund an ADU by replacing their current mortgage with a new one under different terms. The new mortgage, which cannot exceed 80% of the home’s value, typically combines your current mortgage balance with a portion of your equity. Interest rates on the new mortgage may be fixed or variable, depending on the lender’s terms.

This option might not suit homeowners who already have favorable interest rates, limited home equity, or prefer not to extend their mortgage term. While some lenders consider post-construction home value when determining qualification, you’ll still need existing equity to proceed.

3

Home equity loan

Homeowners with equity can secure a lump-sum loan using their property as collateral. These loans, often called second mortgages, typically represent a percentage of your equity and feature fixed interest rates with set repayment schedules.

Home equity loans offer the advantages of predictable monthly payments and favorable terms due to the home serving as collateral. However, defaulting on either your primary mortgage or the home equity loan could result in foreclosure. Consider carefully whether adding another mortgage payment aligns with your financial situation.

4

Home equity line of credit (HELOC)

A HELOC functions more like a credit card than a traditional loan, allowing you to draw funds during an initial period and repay them afterward. This option requires substantial home equity and, like a home equity loan, uses your property as collateral.

HELOCs typically feature variable interest rates, which means fluctuating monthly payments during the repayment period. Once you enter repayment, you cannot access additional funds until the balance is paid in full.

5

Construction loan

Construction loans finance the building phase of home projects—including ADUs—and may convert to mortgages upon completion. During construction, you make interest-only payments, with full principal payments typically beginning within one to two years. Most traditional lenders offer these loans.

This option suits homeowners with limited equity who can manage repayment within a shorter timeframe. However, converting to a mortgage after construction means paying closing costs twice. Interest rates and terms vary, and the ADU must be completed within the short repayment timeline.

6

Renovation loan

Renovation loans streamline the process of purchasing and improving property—including adding an ADU—by combining multiple financing steps.These loans particularly suit buyers interested in fixer-upper properties that require substantial initial investment.

Several types of renovation loans are available:

• Fannie Mae HomeStyle Renovation loan: Finances both home renovation and new ADU construction.

• Freddie Mac CHOICERenovation loan: Covers both new ADU construction and existing home renovations.

• FHA 203(k): Replaces existing loans with a renovation loan featuring lower credit requirements and down payments.

While FHA 203(k) loans offer more accessible requirements, they may require mortgage insurance.

What are the costs associated with building an ADU?

• Square footage
• Geographical location
• Site conditions, like soil conditions and slope
• Permitting and impact fees
• Utilities installation and connections
• Material selections and finishes
• Landscaping

• Credit score: Higher scores generally unlock better interest rates and terms, and some financing options set minimum score requirements.
• Budget and home equity: Most ADU financing options rely on the current equity in your property or the property’s expected value after completing your ADU project. Lenders will typically size your budget based on how much cash you are willing to invest in the project plus your equity in the property. Lenders will typically lend up to 85% of the expected equity in your completed ADU project.
• Financial outlook: Since ADUs often cost as much as a major home renovation, you must be able to carry the ongoing monthly payments. Similar to getting a mortgage on your main home, lenders will look at how much you can afford each month for an ADU financing payment. Lenders typically look at financial metrics like income (and your debt to income ratio), cash reserves/investments, and monthly recurring expenses.

The easy option: build and finance your new ADU with Samara