Financing your ADU project
Paying for an ADU isn’t as straightforward as you might think.
Since personal finance situations come in all shapes and sizes, it’s not unusual to come up with a patchwork of dollars from various sources: all or some of your savings, borrowed funds from friends or family, a loan from a bank, a line of credit on your house, and so on.
Let’s begin with some tried-and-true personal finance wisdom: if you plan on borrowing money, the more cold, hard cash you can scrape together for a down payment, the better.
But how do you go about procuring the remaining funds? We’ll show you in this post. No matter the sum of your starting capital, you’ve got options for procuring more – you just need some sensible financial planning.
Being in a low-income bracket absolutely does not disqualify you from building your dream home. In fact, the state of Oregon has spurred a long list of innovative financial programs and resources dedicated to making ADU’s accessible for all.
The first thing you need to figure out is your budget.
Before you can apply for any sort of financing, you need to know how roughly much money your project will cost in total, from conception to inhabitation. That includes costs of permits and licenses, land (if applicable), drawings, closing costs for loans, construction (design, labor, materials) and even things like appliances and furniture.
Now don’t bust out your calculator and just start plugging in numbers right off the bat. Make sure you’re familiar with the design/build process and where your costs will come from, and take the time to tinker with the tools below to help you figure it all out.
That said, keep in mind that even the most prudent project planners will run into hidden costs. This post is meant to help you create an approximation, not a perfectly precise estimate (in this business, those don’t exist).
Permit Fee Calculator
Not sure what permits you need? The City of Portland has an excellent tool that will help you figure out what to apply for and the costs of permitting fees in your area.
ADU Program Guide
If you haven’t already, visit the latest version of the City of Portland’s ADU Program Guide for more information about ADU rules, regulations and requirements.
HOT TIP 1: Plan to spend roughly $300 per square foot on construction, but keep in mind that the cost of building an ADU varies from project to project. When you factor in labor, materials, a designer, various contractors, etc, the price can fluctuate. Based on this figure, building a 400-sq. ft. ADU with high-quality materials and appliances would cost somewhere around $100,000- $130,000.
HOT TIP 2: Not sure how it all computes with your unique financial situation? Online mortgage calculators can do the heavy lifting with all the math. These tools take stock of your current finances and future goals, and can help you get a better idea of what things like loan terms, down payment, monthly payments, and closing costs for your future ADU might look like.
Once you have a price tag for your project, it’s time to think about your options for procuring the remainder of the funds. If you haven’t started intentionally building up your credit score, now is a good time to start. For better or worse, this is the metric a lot of banks will use when writing a loan and its terms.
Know your options
Choosing the right loan you need to finance your ADU project will depend on a number of factors, including your current home equity, income, credit score, veteran status, and more.
There are a lot of details here related to your individual situation. Suffice it to say that you should plan on spending a good chunk of the planning phase to sorting out your finances for the project. The most important consideration as you begin is whether or not you have equity in an existing home.
If you don’t have home equity in an existing property
If you don’t have sufficient equity built up in a home to get a solid line of credit through your bank, that’s fine! You’re still eligible for all kinds of loans, you just might need to spend more time shopping around for the lowest possible interest rates.
What if you don’t own a home or have a property? Can you still build an ADU?
Yes. Here are some options to look into:
- Construction loans, just watch out for high APR rates (more on that below)
- Personal loan
- Check out credit unions in your area, they often have plans to help get people started
- Loan on a 401k or IRA if you have one.
If you do have home equity in an existing property
Do you own all or a part of your home? If so, refinancing an existing mortgage could be a smart plan, especially if you have a good working relationship with your bank.
House prices in Portland have increased. If you’re a homeowner considering adding an ADU to your lot and have significant equity in your current home, banks may be more willing to give you a line of credit if you want to refinance. Refinancing can also be a great option for those interested in a garage conversion.
- Home improvement loan
- Home equity loan/line of credit
- Refinancing an existing mortgage
- Personal loan
HOT TIP 3: Check out the Earth Advantage ADU Finance Guide, which serves as a snapshot into various financing options in the Portland Metro area, depending on your home equity status (more on that below).