Getting a granny flat loan is easy peasy

Eye-catcher loan of the week:
 Fog the mirror: The income and job sections can be left blank for a 5-year adjustable-rate mortgage provided the owner puts 25% down and lives in the home. Rates range from 5-6%.


What I think:  Second only to the California mortgage meltdown days of the Great Recession, the new 2020 California granny flat (accessory dwelling units) easy-peasy permit and build rules are the most earth-shattering California housing event this century.

Big-time granny flat rule changes start Jan. 1. Today’s column takes you on the road home to granny flat mortgage financing.

Fannie Mae has a program named Homestyle and Freddie Mac has a similar program named ChoiceRenovation. Both provide purchase and refinancing funds to build your granny flat.

In most cases, if at least one living unit on the parcel is owner-occupied, your minimum down payment or remaining equity in the case of a refinance is based upon the “as-completed value.” Value is defined as the lesser of the appraised value or the purchase price and the construction costs.

For example, let’s say you purchased a home for $600,000 and you are spending $200,000 to add an ADU. The appraiser estimates the as-completed value (true market value) at $900,000 but the sales price and improvement costs total $800,000. So, the lender will value your property at $800,000 for financing purposes only.

For L.A. and Orange counties, F & F loan maximum limits are now $765,600. So, a 5% down payment on $800,000 “as completed value” is $40,000. You cough up $40,000 and you finance $760,000. Pretty impressive leverage opportunity!

The requirement that one unit be owner-occupied raised concerns for lenders, said Greg Nickless, housing policy analyst at the California Housing and Community Development Department.

What happens if the owner moved out? Would this trigger foreclosure?

But new legislation addresses that issue. From 2020 through 2024, all units on the parcel may be tenant occupied. Your local building permit will be required to grandfather your parcel under the all-tenants OK for both the home and the ADU’s so long as you are within that five-year timeline.

F & F investment property rules require 15% skin-in-the-game for purchases and 25% skin-in-the-game for refinancing. The value calculations are the same as for owner-occupied properties.

Fan and Fred financing for an ADU runs about 0.625% higher than for a conventional home loan, according to one investor’s rate sheet. F & F also don’t upcharge in price for the ADU units (2-4 units have big pricing hits). But they will not allow you to use the rents from the ADU’s for mortgage approval qualifying purposes.

You can save yourself some money by avoiding local impact fees of $20,000 or much more if your ADU is less than 750 square feet, according to Nickless.

Property tax assessments for new ADU’s typically are equal to construction costs, said Mike Hannah, Orange County real property division manager.

You will receive a supplemental tax bill the first year. After the first year, the tax bill will blend into the parcel tax bill, he said.

For income tax purposes, you can deduct the portion of your fire insurance bills, HOA fees and mortgage interest that apply to ADU’s you rent out, said CPA Marcelo Sroka. And, you can depreciate the cost of the structure over 27.5 years.

Jeff Lazerson is a mortgage broker and adjunct professor at Saddleback College. He can be reached at 949-334-2424 or



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Jeff Lazerson - Mortgage Columnist since 2011