JULY 27TH

Financing an ADU With Your New Home Purchase: Exploring HomeStyle Renovation Loans

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Adding an Accessory Dwelling Unit (ADU) to your property in Arizona is a great investment, whether for additional living space, rental income, or enhancing property value. Financing such a project can be simple with HomeStyle Renovation loans offering a practical solution. Let’s delve into the benefits of using this type of loan, considering a construction cost of $350 per square foot in neighborhoods where homes are valued at $500 per square foot. We’ll also explore additional financing options including Cash-out Refinancing, Construction Loans, HELOCs, and Home Equity Investments.

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Understanding HomeStyle Renovation Loans

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HomeStyle Renovation loans, provided by Fannie Mae, allow homeowners to borrow against the future value of their home after improvements. This makes it easier to finance renovations and additions, including ADUs with your original home purchase. Here’s why they are advantageous:

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  1. Cost Efficiency:

   – These loans typically offer lower interest rates compared to HELOCs, personal loans, and credit cards.

   – Borrowers can renovate any part of their home, including adding an ADU, without a minimum dollar amount.

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  1. Flexibility:

   – You can choose your own contractor, subject to lender approval.

   – HomeStyle Renovation loans can be bundled with HomeStyle Energy for additional savings on energy-efficient improvements.

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HomeStyle Renovation Loan Process

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Phase 1 – Preparation

  • Borrower works with Minimal Living Concepts to submits ADU plans to the lender.
  • Lender reviews borrower’s documents to ensure the project meets all requirements.
  • Lender orders an as-completed appraisal to assess maximum mortgage amount, check loan-to-value ratio, ana

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Phase 2 – Construction

  • Lender prepares to close by checking whether improvement funds need to be escrowed or require a contingency reserve.
  • Lender and borrower execute required documents at loan closing, including a Renovation Loan Agreement.
  • Funds are placed into custodial account, and lender delivers the loan to Fannie Mae®.
  • Lender services the loan, managing all project draws and overseeing the renovation process.

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Phase 3 – Completion

  • Lender receives the final draw request, initiating the last phase of lender oversight.
  • Lender orders a final inspection, appraiser signs completion certificate, and lender provides it to Fannie Mae.
  • Before funds are issued, lender must ensure a clear title and make sure no additional liens remain on the property.
  • After project is completed, lenders can submit required documents to remove recourse.
  • Lender closes the renovation escrow account and uses any remaining funds towards reducing the unpaid principal balance (UPB).

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The Financial Benefits of Building an ADU

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Building an ADU can be a smart investment, especially in Arizona’s growing real estate market. Here’s why:

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  1. Increased Property Value:

   – With construction costs at $350 per square foot and home values at $500 per square foot, the added value of an ADU can significantly exceed its construction cost. For example, a 600-square-foot ADU costing $210,000 to build could potentially add $300,000 to the property’s value.

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  1. Rental Income:

   – An ADU can generate substantial rental income, providing a steady cash flow. This can be particularly attractive in a rental market like Phoenix, where demand for affordable housing is high.

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  1. Versatility:

   – ADUs can be used for various purposes, from housing family members to serving as a home office or rental unit. This flexibility adds to the overall appeal and functionality of the property.

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Additional Financing Options for ADUs

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Several financing options are available for building an ADU, each with its own benefits:

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  1. Cash-out Refinancing:

   – Allows you to refinance your mortgage and take out cash based on your home’s current value. This can provide the necessary funds for an ADU without taking on a separate loan.

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  1. Construction Loans:

   – Specifically designed for building new structures, including ADUs. These loans provide funds during the construction process and convert to a permanent mortgage upon completion.

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  1. Home Equity Line of Credit (HELOC):

   – Allows you to borrow against the equity in your home. It’s a flexible option with potentially lower interest rates, but the amount you can borrow is limited by your existing equity.

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  1. Home Equity Investments:

   – Companies like Unison offer home equity investments, providing cash upfront in exchange for a share in the future appreciation of your home’s value. This can provide up to 25% of your home’s equity without monthly payments, but it does involve sharing future gains with the investor.

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Conclusion

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Building an ADU in Arizona can be a wise investment, offering increased property value, rental income, and versatile living space. HomeStyle Renovation loans provide a flexible and cost-effective financing solution, allowing you to leverage the future value of your home to fund your project. Cash-out refinancing, construction loans, HELOCs, and home equity investments all offer viable paths to making your ADU project a reality. By carefully considering these options, you can enhance your property and achieve your financial goals.

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The Typical Building Process

The ol' fashioned way.

Find an architect

An architect designs your home without discussions with engineers, builders and interior designers. You can’t walk through the home design and experience the layout, proportions of the spaces and quality of the fixtures and fittings.

Hope the design is buildable

An architect designs your home without discussions with engineers, builders and interior designers. You can’t walk through the home design and experience the layout, proportions of the spaces and quality of the fixtures and fittings.

Engineering

The engineer designs the structural systems of the house without any consultations with the contracting builder. They may find costly structural issues with the plan which needs to go back to the architect for alterations, adding to the client’s overall costs.

Collect quotes

The client is happy with the design but at this stage won’t know the true costs of the build or whether it’s on budget until they quote it out to different builders. Often quotes come back with varying degrees of build quality, assumptions, and unknown estimates that don't reflect the real cost of construction.

Quote and fees

It’s up to the client to determine which builder quotes will deliver the best final outcome for them. Throughout the whole process, the architect’s fees are paid as each stage is completed with many architects charging around 6%-18% of your final build costs.

Variable pricing

Because the design team are separate from the construction team, unexpected issues can arise which may add to the build cost. Materials, fittings and features often have to be custom-made to the architect’s and engineer’s specifications, therefore adding to the overall build cost.

Change orders

Because the builder was not involved in the design process and doesn't have a complete understanding of the project, it is very likely that you will experience several cost escalation change orders. The worst part is, the builder profits on these price increases that should have been predicted at the project start.

Our Method

Creating a seamless path to new construction.

Experts working together

Our design and construction team work together on each home design. Our architect, interior designer, engineer and builder collaborate to devise solutions that don’t compromise the style or functionality of the home. This all occurs before a design ever lands on our website.

Curated and custom designs

With MLC, you can choose from a range of meticulously crafted home designs or work with our design team to, alter those designs or create a bespoke design tailored to your unique needs and lifestyle.

Holistic design and build solution

Our streamlined approach saves you time and cost while providing one dedicated team for every aspect of your project. The construction costs are a key consideration throughout the design process for peace of mind, efficiency and certainty.

Transparent pricing

For our pre-designed homes, inclusions and costs are finalised before you commit to building your home. There are no hidden or additional costs due to design revisions once your contract is signed. If an unforeseen condition occurs, we never profit on it. This way our incentives align with you.

Design a bespoke home

Our ‘Bespoke Option’ involves personalised brief-development sessions with our architect and sales teams to fully understand your design parameters. New plans and 3D model elevations and site locality plans will be developed following your brief and in collaboration with our team.

01

Initial brief development consultation

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Bespoke floor plan presented to client for approval

03

3D model elevation and site locality plan presented to client

04

Site visit to understand the plan in its context and make any design changes needed

05

Finalise the revised floor plans and elevations

06

Select your home’s finishes

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