Building an accessory dwelling unit (ADU) can be a smart way to generate rental income, increase property value, or create space for family. But before the first shovel hits the ground, homeowners face a major decision: should you go with a prefab ADU or a custom build?
While both options have clear benefits, they also come with distinct financing considerations. Understanding these differences will help you avoid costly surprises and ensure your project is fully funded from start to finish.
What Is a Prefab ADU?
Prefab (or modular) ADUs are manufactured in a factory, delivered in sections, and assembled onsite. Because much of the work is standardized and completed in controlled conditions, these projects typically offer:
- Lower upfront costs due to economies of scale
- Faster timelines, since weather delays and onsite labor needs are reduced
- Predictable budgets, making them easier for lenders to underwrite
From a financing standpoint, lenders view prefab ADUs as less risky because the costs are more certain. This often translates into simpler loan approvals and potentially more favorable terms.
What Is a Custom ADU?
Custom ADUs are designed and built specifically for your property. This option allows for maximum flexibility in layout, finishes, and integration with your existing home. However, custom projects usually involve:
- Longer permitting processes, especially in jurisdictions with strict planning rules
- Higher and more variable costs, as design and site conditions can introduce surprises
- Extended construction timelines, often requiring flexible financing
Lenders tend to structure draw schedules for custom ADUs—releasing funds in stages as work is completed. In addition, contingency reserves are commonly required to cover unexpected expenses, protecting both the borrower and the lender.
Matching ADU Financing to Your Investment Goals
Short-term cash flow strategy: If you want rental income quickly or need a secondary unit for family housing within a set budget, prefab financing may align better.
Long-term value strategy: If maximizing property customization and long-term equity growth is the priority, a custom build may be worth the more complex financing process.
Frequently Asked Questions About ADU Financing
Q: Can I use a HELOC for ADU financing?
A: Yes, home equity lines of credit (HELOCs) work well for prefab ADUs under $150,000. Custom ADUs may require construction loans due to higher costs.
Q: What credit score is needed for ADU loans?
A: Most lenders require a minimum 620 credit score, though 700+ qualifies for better rates.
Q: Are there government programs for ADU financing?
A: Yes, FHA 203(k) loans, CalHFA ADU grants (California), and local programs offer ADU-specific financing.
Q: How much will an ADU increase my property value?
A: ADUs typically increase property value by 20-30% of the construction cost.
Take Action: Secure Your ADU Financing Today
At Capital Direct Funding, we specialize in tailoring loan structures to the unique needs of ADU projects. Whether you choose prefab or custom, our goal is to make sure your project is fully funded, financially secure, and completed without unnecessary delays.
Ready to Turn Your ADU Dream Into Reality?
Stop letting financing confusion delay your ADU project. Whether you're leaning toward a quick prefab build or a fully customized design, we'll structure the perfect loan to match your vision and budget.
📞 Prefer to talk? Call us today at (626) 796-1680
🌐 Visit us online at capitaldf.com