Unless they can pay in full up front, prospective builders of accessory dwelling units have to finance their projects.

Lenders said it’s crucial for consumers to consider their options, plan ahead and know their costs early on.

Alex Brockway, a residential lending officer with Kennebunk Savings Bank, said financing tends to be “people’s biggest question mark” throughout the development process. The budgeting and planning process can often take longer than expected, too.

“I try to tell people to be patient,” Brockway said.

Generally, there are two major phases when it comes to planning an ADU build, he said. First, an early “fact-finding stage,” where property owners look at their site, look at the products available and determine what they can reasonably afford. Lenders may be able to offer general guidance at this stage.

“We can run numbers, we can run payments,” he said. But these are estimates and may change as new details emerge.

It’s generally not until after a site analysis and design are completed that property owners and lenders can really begin to walk through the finances.

“We need to know what they’re going to build. We need to know the costs that are involved,” Brockway said. “We want to appraise that and give you the value for once everything is done. So we need to know that going into it.”

Costs can vary significantly based on the type of ADU someone is looking to build. Detached structures are the most popular but can also be the costliest.

Brockway said renovating an existing part of one’s home to make an attached ADUs is generally the most cost-effective option “if people have the space.”

Opting for a prefabricated or modular unit can make financing simpler from a construction standpoint, Brockway said. But there can still be surprise costs that come up with site-specific needs like hooking into utilities, especially for remote builds.

“Sometimes it can be like $50-$60,000 more in site work just to get it ready to go,” Brockway said.

WHAT TYPES OF LOANS ARE AVAILABLE?

There are several types of loans available for property owners looking to build an ADU, but each has its own benefits and drawbacks, so the best option depends on an individual’s specific circumstances — including the equity of their primary property and the terms of any existing mortgage — the officers said.

“It pretty much jumps out which one’s going to work and which isn’t,” said Marc Crocker, a mortgage loan officer at Bangor Savings Bank. He outlined three key types of financing available to potential ADU builders.

1. Mortgage cash-out and refinance

If a property owner has sufficient equity in their home, they can use that cash to begin building an ADU. From there, the remaining balance and new costs of construction can be bundled together into a new mortgage. This is a relatively straightforward process, assuming the equity exists, Crocker said.

“The issue with that — if you’re cashing out today, your rate’s probably going to be a couple percent higher than what you probably have currently, if you got your mortgage within the last five years,” he said.

Crocker said that tends to be the least common approach among his customers.

2. Home equity line of credit

With a home equity line of credit, a lender qualifies a property owner for a certain amount of funding based on the equity available in their primary home. The property is then used as collateral to secure the loan, according to the Federal Trade Commission.

This is a revolving credit account from which the property owner can draw money as needed to pay for materials, contractors and other costs as they come up. That can offer more flexibility than some other funding methods.

“Those products are based on the current value of your home,” Brockway said. “If somebody’s got little to no mortgage and a ton of equity, yeah, that’s probably a good option.”

Home equity lines of credit can typically take about a month to process, and they offer relatively minimal closing costs, Crocker said. That can make them attractive for property owners who have already paid off a decent chunk of their mortgage. They have long been used for major renovations or upgrades.

“But the problem can be (if) you don’t have enough equity in the property as is to meet the guidelines for a loan,” Crocker said. “That’s where the ADU second-lien product comes in.”

3. ADU second lien

A relatively new type of loan designed specifically for ADUs, these can offer funding amounts based on the assessed value of a to-be-completed ADU.

The exact proportion varies from lender to lender, but they can be between 80% and 90% of the final appraised value. If a property owner plans to rent out their ADU, that income can also come into play when determining borrowing limits, Brockway said.

All that means a potential borrower will need to have blueprints and other plans drafted before they can seek funding. But unlike refinancing an existing mortgage, it allows a property owner to keep their current mortgage rate, which may be lower than what’s currently available.

“If you’ve got a nice low rate on the first mortgage, you don’t have to touch that,” Brockway said.

In this case, funds are held in escrow and released according to a project timeline, rather than being paid out in a lump sum. Crocker said his team usually aims to plan for three or four withdrawals over a period of between six and 12 months, depending on the complexity of the build.

“That can surprise people,” Crocker said. “There could be a significant amount of money needed up front, that could potentially get reimbursed for the borrower.”

Once construction is complete, these loans generally take on a typical, fixed-rate structure.