5 Ways to Finance an ADU Using Post-Construction Home Value

Understanding ADU Financing

Accessory Dwelling Units (ADUs) have become an essential part of solving the affordable housing crisis, with many homeowners looking to build them as rental properties or additional living spaces. However, financing an ADU can be a challenge, given that construction costs often range between $100,000 and $350,000, and even higher in expensive markets.

The good news is that some lenders now offer financing based on the future value of your home after the ADU is built, allowing homeowners to leverage more equity to cover construction costs.

In this guide, we explore five financing options that use post-construction home value to fund ADU projects.

1. HELOCs Based on Future Home Value

Traditionally, home equity lines of credit (HELOCs) are based on your home’s current value. However, certain lenders now offer HELOCs based on the as-completed value—what your home will be worth after the ADU is built.

How It Works

✔ The lender determines your home’s post-construction value.
✔ You can borrow up to 90% of this estimated future value.
✔ Funds are disbursed as needed, making it ideal for covering construction expenses.

Example

• Current Home Value: $500,000

• Future Home Value with ADU: $650,000

• HELOC Loan-to-Value (LTV) Limit: 90%

• Max HELOC Amount: $185,000

📌 Where to Find It: Companies like Renofi and local credit unions offer future-value HELOCs.

2. Cash-Out Refinance Based on Post-Construction Value

A cash-out refinance replaces your existing mortgage with a larger loan, allowing you to withdraw equity. Some lenders now calculate this based on your home’s future value with the ADU included.

How It Works

✔ You refinance your mortgage at 80% of the projected home value.
✔ The new loan pays off your current mortgage, and the difference is disbursed as cash.
✔ Ideal for homeowners with little existing equity but high future equity potential.

Example

• Current Loan Balance: $300,000

• Future Home Value: $700,000

• Max Loan Amount (80% LTV): $560,000

• Available Cash: $260,000

📌 Where to Find It: Renofi and specialized mortgage lenders offer future-value cash-out refinances.

3. Fannie Mae HomeStyle® Renovation Loan

Fannie Mae’s HomeStyle Renovation Loan is a conventional mortgage program that lets homeowners borrow against the as-completed value of their home.

How It Works

✔ You can finance up to 95% of the post-construction home value.
✔ Funds are disbursed during the renovation process.
✔ Works for both home purchases and refinances.

Example

• Current Home Value: $400,000

• As-Completed Value: $525,000

• Max Loan Amount (95% LTV): $498,750

• Funds Available for ADU: $98,750

📌 Where to Find It: Most conventional mortgage lenders offer HomeStyle loans.

4. Freddie Mac CHOICERenovation℠ Loan

Similar to HomeStyle, the Freddie Mac CHOICERenovation Loan lets homeowners finance ADU construction based on future home value.

How It Works

✔ Borrow up to 95% of the post-renovation value.
✔ Funds are released in stages during construction.
✔ Can be used for new construction, remodeling, or disaster repairs.

📌 Where to Find It: Most Freddie Mac-approved lenders offer CHOICERenovation loans.

5. FHA 203(k) Renovation Loan

For those with lower credit scores or higher debt-to-income ratios, an FHA 203(k) loan can be a great option. It allows financing based on the after-improvement value with minimal equity requirements.

How It Works

✔ Borrow up to 97.75% of the future home value.
✔ Can include both construction and closing costs in the loan.
✔ Requires mortgage insurance (MIP), which adds to costs.

Example

• Current Home Value: $350,000

• Future Value: $475,000

• Max Loan Amount (97.75% LTV): $464,312

• Funds Available for ADU: $114,312

📌 Where to Find It: FHA-approved lenders offer 203(k) renovation loans.

Final Thoughts: Choosing the Right ADU Financing Option

Financing an ADU is now more accessible than ever, thanks to lenders offering loans based on future home value. Whether you choose a HELOC, cash-out refinance, or a renovation loan, the best option depends on your credit score, existing equity, and financial goals.

Best Options Based on Borrower Profile:

✔ Best for Homeowners with Low Equity: Future-Value HELOC or Cash-Out Refinance.
✔ Best for Homeowners with Conventional Loans: HomeStyle® or CHOICERenovation.
✔ Best for Low Credit Score Borrowers: FHA 203(k) Loan.

Before making a decision, compare multiple lenders and discuss your options with a qualified mortgage professional.