With the lack of inventory and high interest rates in today’s housing market, it’s tougher than ever to find your dream home. But what if you find a home that could be perfect for you, but needs some fixing up, or you want to add an ADU to generate rental income or for a family member to move into?
That’s where renovation purchase loans come in. With one close that includes purchase, renovation costs, and ADU construction costs, a renovation loan can be a great option if you’re buying a home with ADU potential.
What is a renovation loan?
A renovation loan is a first mortgage that finances both your home purchase and renovation costs, which can include adding an ADU. This allows you to include the cost of renovations or an ADU into your purchase, without having to separately find financing or use cash savings for a renovation or to build an ADU. That way, you can buy your dream home and renovate it or add an ADU right away.
How does a renovation loan work?
While most mortgages are based on a home’s current value, renovation purchase loans are based on an estimate of the home’s “as-completed value,” meaning what it will likely be worth once your renovations or ADU project are complete. Our own research finds that an ADU can add 18-35% to the value of homes in the Los Angeles area, and a renovation loan factors this added value in when you apply for the loan. As part of the underwriting process, an appraisal will review your renovation or ADU plans, and forecast the home’s as-completed value.
Additionally, a growing number of home lending products allow you to pre-count expected rental income from an ADU when you apply for the loan. Many renovation loans, like the Freddie Mac CHOICERenovation Loan, also allow anticipated ADU rental income to be counted towards your total qualifying income. If you’re building an ADU to rent, this provision can make it easier to qualify for the loan amount you want.
Why should I consider a renovation loan?
There are a few reasons why renovation loans are worth considering if you’re a homebuyer who’s interested in building an ADU. The first is that the interest rate on renovation loans is similar to the rate on a first mortgage. Depending on the cost of the home you’re buying and the cost of the ADU project you have in mind, you may save money by financing both projects with a renovation loan, rather than buying the home with a mortgage now and later financing the ADU project with a home equity loan, line of credit, or personal loan.
Second, renovation loans afford you flexibility, since you can use the funds to pay for home improvements, like a kitchen remodel or bathroom renovation, along with adding an ADU. This makes it easier to buy a fixer-upper house and turn it into your dream home.
Want to learn more about ADU financing, or get pre-approved for a renovation purchase loan? Book your free consultation with a Revival Homes ADU expert here!