ADUs are accessory dwelling units, also called mini homes. They use an existing residential property to create a separate living space. This post discusses financing an ADU, with a focus on credit qualification, borrower reluctance, and a few practical options.
An ADU loan is usually part of the mortgage finance industry because the ADU is attached to an existing primary residence. The loan is often large, larger than a car loan or typical home improvement loan, and may be one of the borrower’s largest debts after the primary mortgage.
Lenders evaluate income, debt-to-income ratio, credit score, and other factors. This makes ADUs easier for relatively well-off homeowners to finance and harder for moderate-income owners.
Suggested ways to improve credit worthiness include:
The post says Colorado legislation supporting ADU development includes a provision and funding for the Colorado Housing and Finance Authority (CFHA) to organize a financing program for moderate-income ADU buyers. That program is expected to be announced in the fall.
Interest rates are a major factor. Many homeowners would rather not refinance a low-rate primary mortgage at current rates. One option is a home equity line of credit, or HELOC, which keeps the primary mortgage in place and creates a blended interest rate.
The post also notes an emotional barrier. Taking on more long-term debt can feel intimidating, especially for buyers of moderate means.
The article mentions third-party investment in the ADU by someone who does not live on the property. The post says this was not previously an option in Colorado, but recent legislation now allows it. The legal structure would still need development.
The author says a similar idea has been used in South Africa to help address housing needs.
Next month: Why smaller living spaces work well