Providing independent accommodation – Whether you need extra care yourself, have an elderly relative who is unable to live completely on their own, or have children who you want to help get on the property ladder, building an ADU can solve all three of these problems. As we will discuss, each of these instances could merit a different form of financing of the cost of the ADU. First, establish your borrowing capacity and how you intend to pay off a loan There are several reasons why this makes sense. First and foremost, establishing how much you can borrow will save you considerable time (and possibly money). Second, having a set budget will save on disappointment in the future, as discovering you can’t afford your chosen ADU is not a road you really want to go down. How you intend to finance any loan for an ADU is also important, and here we would make two recommendations. First, speak to your accountant to assess your tax situation and if you are retired, also how your pension stands. The second recommendation we would make is to speak to a mortgage broker who is experienced with or even specializes in loans for ADUs. One person we would suggest you speak with is Meredith Munger at ADU Loans. Establish how much you can borrow The following two sections: “Establish how much you can borrow” and “Establish how much you can afford to borrow” are important, so please do not gloss over them. There can be a huge difference between what you can borrow and what you can afford to borrow. Banks and lenders want you to borrow money from them; that’s how they make money from you. In the U.S., as in other countries, various rules set limits on how much they will be prepared to lend you, but those amounts can vary significantly from country to country and even from lender to lender. As examples, in the U.S. there is a general 24:36% rule where lenders will only advance you a certain amount of money based on repayments of the loan not exceeding 28% of your gross income, and that repayments of all debts—car loan, credit card debt, etc., will not exceed 36% of your gross income. However, certain lending sources will stretch the 36% to 43%.
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