More know how to finance your ADU

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Thank your interest in this important topic of how to finance your Accessory Dwelling Unit. We thought it would be beneficial to explain the interrelation between different elements of this chart, and how to best interpret the options currently available. Note: This is a living document as new products are being developed, so check in frequently for the latest version. 

Here are some quick facts to know about the various forms of financing.

So in discussing the topic of financing , as many homeowners are starting to learn about the many benefits of creating a guest house, ADU, also known as granny unit, or in-law; one of the biggest challenges is how to actually pay for the building and developing of the unit. 

Homeowners have many options as to how to go about financing ADU’s, however one of the biggest single factors is the substantial cost of building one. This is particularly true in the most highly populated areas, where labor costs and/or cost of construction is typically higher, it makes it additionally challenging to finance these projects.

And for that very reason, I felt I need to create a visual chart, explaining not only the options available in the current marketplace, but also how to go about figuring out the best product based on one’s personal situation in regards to the different qualifications a lending institution will be looking at. For those that would benefit from any financing of their project, they will now have a simple chart to follow and make the decision-making process more simplified and straightforward. 

With the former in mind let us figure out what may be the best solution in your case, for starters below: 

One of the things we learned based on a large number of respondents of those who financed their ADU’s, as they went through the process is the fact that there may not be single option, but there may be a combination of a several options, either utilized at the same time or in a sequence of a combination at different intervals.  

As a matter of fact, as I having been doing this for several years, we’ve also learned that most homeowners are actually taking advantage of a couple of financing options to where it makes it easier for them to get to the finish line. 

Because there’s a lot of elements that get involved in in building ones at you. So, with that, I wanted to share sort of the highlights, I will not be going to go into the detail of each and every product in this presentation, for now, besides, this is an evolving model. But for the time being, as you’re looking at this chart today, there are products on the left and products on the right, and are color coded for ease of use. 

The higher the green area on the chart, explains the importance of having equity in one’s home. Equity basically is the difference between the value of the property minus any loans or liens against the property. If you were to sell, whatever you’re left with would be your equity. 

As you can see, there are two options on the right for someone that has higher equity, and there’s one option on the left, in each bubble or circle, there are several options. But as you can see, depending on your specific situation or position, one would lean towards one or the other, subject to one’s preference. 

Then in the middle, we have the blue area, which has to do with one’s income. When one looks at one’s family income or household income, as it’s also known, one would look at any qualifying income to repay the debt. 

And so having said that, on the left hand side, again, if you’re in the lower spectrum of income and or your income is more limited, then there are quite a few options on the left hand side for and for those that need assistance in regards to being able to substantiate and quantify their income, that is all different sources of income. 

On the right-hand side, however, there are fewer options. Someone who has a potentially higher income would qualify for to construct and develop their ADU using the one product on the right, at least for the time being as more products come to market. 

And then lastly, on the bottom of the chart is everything in black color, as this has to do with your credit, and or creditworthiness. As we know, the higher the credit score, the better the terms of any financing that one would qualify for. On the left, for those that are maybe credit challenged, maybe have not started out their credit history a long time ago, maybe someone that just purchased a home not too long ago, or maybe someone that is interested in purchasing a property that has the potential of an ADU or that already has an ADU on the property. These are all options for those that may be challenged when it comes to some credit blemishes that may have happened at some point in the past. And lastly, for someone with a possible lack of credit history, the products on the left-hand side, may be easier to obtain. 

And then on the right-hand side are for those that have a higher credit score, have possibly more established credit or have used credit more often, also known as credit utilization. And so, the right-hand side, as you can see on the chart, there are several options to determine, what would maybe the best source of financing, after all.

And so, in summary, there are many ways to go about financing your ADU, however, it is important to reach out to a trusted advisor, someone who has preferably been involved in the ADU space for some time. Because it is unique, and it is different. It is important to connect with the right individual. 

With that said, as you go about looking at the different options, it’s also important to make sure you ask the right questions. And hopefully, by having shared this information on this chart, you you’ll be able to use the different products or product names in asking those questions and evaluating, what options would be best suited for your individual situation or circumstance. 

In summary, what is most important to me, as an ADU and Mortgage professional, is to make sure that you actually end up with the absolute best source of financing to develop your project to where it will be a win-win for all parties concerned. And to make sure that your project is successful, and that you have access to not only the best sources of financing throughout the project, but also to keep in mind one could obtain some type of temporary financing, which upon completion of the project be converted or extended into a more permanent source of financing. Good luck on your project and seek professional advice as there is a lot at stake. 


Robert S. Huibers

Senior Mortgage Banker/Broker