Financing And Building ADUs Or In-Laws CUTEST HOUSE I EVER SAW

I have been in the mortgage industry since 1994 and have seen thousands of homes in every setting imaginable.

And the cutest house I have ever seen was a 3,500 square foot brick, single-level ranch house on ten acres in the wine-growing region of Livermore Valley in California.

It had flowered walkways, a veranda overlooking the valley, and a rolling oak setting that looked like a movie set.

And – it was just one of two guest houses (the other was identical) on a huge estate with a 10,000 square foot primary dwelling.

It was the ultimate example of a perfect “ADU” or in-law unit, and it was part of a woman’s “dream estate” with literally every known amenity (vineyards, home theater, gardens, swimming pools, game rooms, extra garages, barns, horse facilities, sport courts, putting greens, etc.).

A few interesting asides:

  1. OWNER: The owner of the property was a brilliant woman with an extremely successful contracting business. The state required a certain percentage of all contracts to be awarded to women at the time, and she did an amazing job of winning as many bids as she wanted. She was one of those super talented and charismatic people that everyone wants to be around and who would have been similarly successful no matter what she did.
  2. APPRAISAL: To appraise an estate like that, the appraiser had to travel over 25 miles in all directions to find similar “estates” to use as comparable sales.
  3. OWNER SOLD AFTER TWO YEARS: The owner didn’t stay in her “dream home.” It turns out buying perfection with every amenity requires an enormous amount of maintenance, money and time (even if you have a large staff to help). This is something I have seen time and again over the years.
  4. FUNCTIONAL OBSOLESCENCE: This was years ago, but the property appraised for less than it cost to build at the time because the market for such an estate was so limited. This is another great example of “functional obsolescence” (it was an “overbuild” to say the least) in the appraisal realm.

OK – that was a ridiculously long segue into the topic at hand – financing an ADU (Accessory Dwelling Unit).

It was also a reminder to everyone to not go overboard if they plan on building an ADU. 😊

And finally, it was also way too long of a segue in light of the fact that the options for financing the construction of an ADU are limited.


Option #1: Cash Out Refinance: This is not that limiting though in light of the fact that so many people have so much equity in light of the recent appreciation wave. The drawback of course is that borrowers could end up with a higher rate than what they have now because of the “hits” to the rate for cash out and because rates remain 3/8% higher than where they were last year.

Option #2: Home Equity Line of Credit (HELOC): This is a great option if borrowers don’t mind an adjustable rate, as HELOCs are tied to Prime Rate and thus adjust with changes in Prime Rate. But, HELOCs are often free, they can go as high as 95% combined loan to value, and borrowers only pay interest against the amount they borrow when they need the money.

Because Texas has stringent HELOC limitations, the cash out refi option is probably better. But, in CA, I like the HELOC option because of its flexibility – as long as the balance won’t be so high that the risk of the variable rate becomes an issue.


Prior to the 2008 meltdown, I knew of some ADU builders who offered financing of various sorts (often fixed-rate seconds) through lenders they had relationships with. I am not aware of any ADU builders that offer financing now and would love to hear from anyone who does.

There are banks that offer construction loans for ADUs but such loans for a relatively small amount of financing seem like more trouble and expense than they are worth, so I recommend the above options instead.


While this blog is about financing the construction of new ADUs, I encourage everyone to also read this blog about valuing an ADU.

ADU EXPERIENCE – The Prefab Guys

Our office used to be next to a company that sold precut or prefab ADUs (

I like prefab offerings like these because of how much less expensive and more efficient they can be.

But, what most impressed me with the experienced prefab guys was how well they knew the local zoning and permitting requirements, and how quickly they could navigate them.

This is because I saw lots of “do-it-yourselfers” get hung up with permitting issues and/or end up with “glorified sheds” that could not even be considered dwelling space in the end and that added minimal value to the property.

So – if anyone is building an ADU, this is a reminder to make sure their builder (or someone advising them) has experience in the realm.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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