Want to Add a Granny Flat or Rental ADU? Here’s How to Finance It

Are you dreaming of adding an accessory dwelling unit (ADU) to your property? Whether it’s a granny flat, carriage house, or backyard cottage, ADUs are gaining popularity as an innovative solution to the shortage of affordable housing in the United States. In this guide, we’ll explore the financing options and trends that make realizing your ADU dream easier than ever.

Why ADUs Are in Demand

The demand for ADUs is on the rise, driven by a shortage of affordable housing in the US. Local and state laws are evolving to make it easier for homeowners to build ADUs, with some areas adopting “by-right approval,” reducing barriers to construction. Homeowners are exploring ADUs not only as a rental income source but also as a way to keep loved ones close by, offering an alternative to expensive nursing homes.

Types of Accessory Dwelling Units

Before diving into financing, it’s crucial to understand the types of ADUs available. From additions to existing structures to stand-alone constructions in the backyard, ADUs can take various forms. Fannie Mae sets basic requirements, such as a separate entrance, kitchen, sleeping space, and bathroom. Local regulations may dictate specifics like parking and utility hookups.

Varieties of ADU Loans

Considering financing options is a key step in turning your ADU dream into reality. Two main approaches exist: borrowing equity or opting for a construction/renovation loan.

1. Borrowing from Equity:
– Ideal for those with sufficient equity and a desire to maintain a low-rate primary mortgage.
– Potential drawbacks include higher interest rates on equity products and borrowing limitations (up to 80% of the home’s current value).

2. Construction or Renovation Loans:
– Suitable when borrowing from equity falls short.
– Allows you to borrow more based on the projected value of your property after ADU construction.
– Drawback includes accepting a potentially higher mortgage rate.

Renting Out Your ADU

If you plan to rent out your ADU, some loan programs may consider a portion of the tenant’s rent as income during the loan application process. This varies by program and may depend on factors like your previous experience as a landlord.

Finding the Right Lender

Whether you decide to borrow equity or opt for a construction/renovation loan, finding the right lender is crucial. Contractors can be valuable sources of lender referrals, helping you assess your financing needs early in the process. Alternatively, you can start by reaching out to a trusted mortgage lender for guidance and potential contractor referrals.

Unlock the potential of your property with an ADU and explore the financing options that align with your goals. From keeping family close to generating rental income, ADUs offer a versatile solution to the evolving housing landscape. Start your journey towards an enhanced living space today!