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How to finance an ADU

Building an accessory dwelling unit (ADU) on your property can be a great way to add extra income or provide housing for family members. But, let’s be honest, financing an ADU can be a bit of a headache. From traditional mortgages to owner financing and rent-to-own options, it can be overwhelming to navigate through the different financing options available. But don’t worry, we’ve got you covered! Here’s a breakdown of some of the most popular options to help you make the best decision on how to finance your ADU project.

First, let’s start with traditional mortgages. This option involves taking out a loan to purchase the ADU property, much like you would with a traditional home. You can either opt for a home equity loan or a second mortgage on the property. However, keep in mind that lenders may be a bit hesitant to approve a loan for an ADU since they are considered to be a less traditional type of property.

Another option to consider is the FHA 203k loan. This government-backed loan can be used to purchase and renovate a property, including an ADU. This is a great option if you need to make repairs or renovations to the ADU before moving in.

If you have a lot of equity in your home, a home equity line of credit (HELOC) could be a good option for you. This type of loan allows you to borrow money using the equity in your home as collateral.

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Another option to consider is a personal loan. This type of loan is not secured by a property, but it does have a fixed interest rate and a set repayment period. It can be a good option if you don’t have a lot of equity in your home or if you’re not sure you want to put your home up as collateral.

For those who are on friendly terms with the property owner, owner financing could be a viable option. This means that the owner provides the financing for the ADU. This can be a great option if the owner has the financial means to do so and is willing to work with you to make the purchase happen.

Rent-to-own is another financing option where the tenant rents the property for a certain period of time, during which they have the option to purchase the property. This option allows the tenant to live in the property and make payments towards the purchase so that they can eventually buy the property.

Last but not least, California residents can take advantage of the CalHFA ADU Grant Program, which provides a grant of up to $40,000 to assist with the development of ADUs in California. Eligible applicants must meet certain income and credit requirements, and the ADU must be used for low to moderate-income households.

In conclusion, financing an ADU can be a bit of a maze, but with a little bit of research, you can find the best option for you. From traditional mortgages to government-backed loans and owner financing, there are many options available to help you achieve your ADU dream. Remember to consult with a financial advisor or mortgage specialist for guidance and don’t forget to check out the CalHFA ADU Grant Program if you’re a California resident.

Building an Additional Dwelling Unit can be as easy as 1-2-3, start with our Free Property Check to check whether your property qualifies for an ADU.


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