Traditional Financing vs. SkyDADU
Why do lenders hesitate to offer, or flat out deny offering construction loans only for DADUs?
This is because most people have a mortgage on the main house. Even if you ask the main home’s mortgage lender to underwrite a DADU loan, the lender might agree, but would then force you to refinance your main home’s mortgage at today’s higher rates before providing you a construction loan for the DADU.
Here are some reasons:
- Position on the Deed of Trust: Lenders must take the first position on the deed of trust to protect themselves in case they have to foreclose.
- Property Value and Risk: Lenders often view DADUs as riskier investments because they can complicate the property’s overall value assessment since it can now be sold separately from the main house. The presence of a DADU might not always increase the property’s value proportionately, making it harder for lenders to determine the loan-to-value (LTV) ratio.
- Loan Type Restrictions: Some mortgage products have specific restrictions that do not allow for the inclusion of DADUs. For example, certain government-backed loans might have limitations on financing properties with additional units.
How does SkyDADU differ from the Traditional Financing?
Unlike the traditional debt financing, SkyDADU provides “Equity Financing.” Our Equity Partners are interested in owning the DADU (up to 50%) with you for 10 years. Since SkyDADU provides all legal requirements for the DADU (such as setting up the LLC [Limited Liability Corporation], condominiumizing the DADU separately from the main home, establishing the HOA [Home Owners Association] to manage the inner workings between the main home and DADU, etc. etc. etc.), the DADU now can be rented to earn monthly income or sell it when the build is completed to seek proceeds from the sale [with the stipulation that a partial reconveyance of title is approved by the first position deed holder].
But if you have already secured the necessary funds to build your DADU, please contact Sockeye Homes so that you can get started with the Design-Build process.
The Pros and Cons
Construction Loan
PROS:
- Dedicated funds: Specifically for building projects (only on the main house), ensuring the funds are used appropriately.
- Interest-only payments: Often only require interest payments during the construction phase.
CONS:
- Strict requirements: As stated above, the lender forces you to refinance your main mortgage at a higher interest rate.
- Convert to a Mortgage: The lender may be unable to turn the loan into a mortgage if the appraisal affects either (or both) the main house and DADU.
HELOC
PROS:
- Flexible Use: The equity you have can be used for a variety of purchases (NOTE: But most likely not allowed to pay for the capital prerequisite due to the negative impact it has to the Loan-To-Value).
- Percentage-Based Funding: Accessing partial funding allows homeowners to keep their existing low-interest rates.
CONS:
- Variable interest rates: Rates can fluctuate, leading to higher payments.
- Amortization: It’s typically structured as interest only for the first 10 years, then it amortizes for the following 10 years at the 15-year rate, leaving you unclear of the pay-off scenario.
Family Loan
PROS:
- Flexible Terms: Terms can be more lenient and customized to your situation.
- No Credit Impact: Typically doesn’t affect credit scores or require a credit check.
CONS:
- Strain on Relationships: Financial disagreements can lead to personal issues.
- No Formal Structure: May lack legal protections and clear terms, leading to misunderstandings.
Access Retirement Early
PROS:
- Immediate Funds: Quick access to a significant amount of money if needed urgently.
- No Credit Check: Doesn’t affect your credit score or require a credit check.
CONS:
- Penalties and Taxes: Early withdrawal can result in penalties and income tax liabilities.
- Reduced Retirement Savings: Depleting retirement funds may impact long-term financial security.
Hard Cash Lender
PROS:
- Quick Approval: Faster processing compared to traditional banks, ideal for urgent needs.
- Less-Stringent Criteria: More lenient on credit scores and financial history.
CONS:
- High-interest rates: Significantly higher rates and fees compared to conventional loans.
- Short-term loan: Often requires repayment in a shorter period, increasing financial pressure.
What's the Next Step?
From feasibility to the last nail, our experts will help turn your DADU vision into reality. Let's get Started!
Already have the necessary funds to build your DADU?
Please contact Sockeye Homes so that you can get started with the Design-Build process.
Ready to get started or have questions?