ADU financing is different from a standard home loan. But don’t worry—James Carmody of Synergy One Lending in San Diego is an expert in ADU lending and told us exactly how the process works.

No need to stress if you’re prepared!

Homeowners usually finance their ADUs with a cash-out refi, a renovation loan, or a HELOC, all of which are explained here. Depending on the type you choose, you may experience a few more hurdles than if you were applying for a simple home mortgage. 

Know your budget

The first thing you need to do, says James Carmody, is know your numbers. “A lot of times people come to us early in the process, they haven’t talked to a Maxable, they may have done some googling and think their ADU will cost 100 grand and it’s 300 grand. That’s going to stop the loan process in its tracks.”

A Maxable Site Evaluation will give you a current realistic budget range for your ADU based on your property, location, ADU size, and other elements. Six-month-old estimates may not be accurate anymore.

Interest rates, the price of materials, and inflation will also affect the end cost of your loan.

Get Prequalified for ADU Financing

With a realistic budget in hand for your ADU financing, you can meet with lenders to get prequalified for a loan. “Have a lender review your documentation,” says James. “Have them run your credit. Within 24-48 hours they should be able to tell you whether you’re going to qualify for this loan or not. 

“You don’t want to meet with architects and contractors and get super excited, and then find out that the way you file your tax returns prohibits you from qualifying for a loan.”

Documentation for ADU loans

When you’re ready to actually apply for the loan, be prepared to supply multiple rounds of documentation. Homeowners can find this frustrating because they don’t understand what’s happening behind the scenes. 

There are several people you’ll be providing documents for.

The loan officer serves as the lending institution’s salesperson. They’ll ask you for, say, 15 documents relating to your assets, income, and debt. They will give your application, including these documents, to the loan processor.

The loan processor is a middleman between the loan officer and the underwriter. They’ll review the application and might ask for a few more documents. They’ll then pass it on to the underwriter.

The underwriter interprets the guidelines of the loan you’re applying for and sees whether your application qualifies. They’ll probably ask for several more pieces of information.

“In a perfect world you would only have to do this twice with the underwriter,” says James. “You would submit it, the underwriter would say, ‘You’re approved, with these conditions.’ You’d provide those conditions, it would go back to the underwriter a second time, they’d clear it, and then you would move forward with loan doc signing and closing.”

What clogs up the documentation process?

When it comes to ADU financing, each homeowner is different, so it’s impossible to guarantee that there will only be one round of back-and-forth between you and the underwriter. But there are things you can do to help your cause.

  • Give the underwriter exactly what they are asking for in their feedback to you.  If you don’t, it will trigger a request for even more documentation. 
  • Be transparent and comprehensive about reporting every bit of your income, assets, and debt. A common situation is that income on an applicant’s bank statement is not reflected in their paycheck. This will trigger a request to explain the source of the income. 

Employment verification

Your employment is verified in several different ways. One is paper documentation: your pay stubs, W2s, and tax returns.

Written documentation may also come into play if you earn income from things like overtime or sales commissions. The lender will want to know that this income is going to continue, and may ask your employer for a letter confirming it.

The last type of verification, which is typically done within 48 hours of closing, is the lender calling your employer to verbally confirm that you are still working there.

“A key thing we’ve been telling our borrowers is to get clear at the beginning of this process on how your employment will be verified,” says James. 

It’s especially important to know who your lender is going to call during that final 48 hours before closing.

  • Will your employer at the time of closing be the same as your current employer? 
  • Some large companies outsource employment verification. Do you have that contact info?
  • Maybe one person in the HR department handles employee verification for your company. Do you have that person’s cell number in case they aren’t at work the day your lender calls for the verbal verification?

Appraisals and your ADU financing

If you’re not working with a local lender, it’s important that your lender use a local appraiser to assess the value of your property. There are neighborhoods and micro-neighborhoods in California cities, and you need to get an accurate appraisal.

Be aware that the potential income you will earn from renting your ADU (or from renting your house and living in the ADU) will not be factored into the loan application. This is an ongoing challenge in ADU financing and one that lenders and ADU advocates are working hard to change.

How long will it take to get your loan approved?

Generally speaking, it takes 60-90 days. It depends on current interest rates (which affect the number of people applying for loans) and how well-staffed your lender is. 

It also depends on your personal situation and the type of loan you’re applying for. Jumbo renovation loans are more heavily scrutinized and require more paperwork than loans provided through Fannie Mae and Freddie Mac, for example.

“There can be several rounds of back-and-forth,” says James Carmody. “A good lender is going to say, ‘This process is bumpy and I’m going to hold your hand every step of the way.'”

Having realistic expectations and clear communication with your lender is a recipe for success, he concludes. “That’s how people can win with these types of transactions and opportunities.”

Maxable makes ADU financing easy!

It’s clear from our conversation with James Carmody that the first step in building an ADU is figuring out your budget. The easiest way to do that? It all begins with a free ADU Planning Phone Call. Talk to you soon!

After helping write state laws, educating thousands of homeowners, and completing hundreds of Site Evaluations and ADU projects, we know accessory dwelling units better than anyone else. That’s why Maxable is California’s leading ADU Marketplace.

Special thank you to James Carmody at Synergy One for his contributions to this post.