Can You Get a Residential Mortgage for a Property with an Accessory Unit? Insights for Retired Investors
Retirement is a time to relax, but it’s also important to think about your finances. If you’re retired and considering buying a property with an accessory unit, you might wonder if you can get a residential mortgage for it. This guide explains how to qualify for such a mortgage and why it could be a good option for your retirement savings. We’ll also cover how rental income from the unit can help with financial security and what to do if the income doesn’t cover the mortgage payments.
Understanding Residential Mortgages for Properties with Accessory Units
What is an Accessory Unit?
An accessory dwelling unit (ADU) is a smaller, secondary living space on the same property as a primary home. Think of it as a mini-house or apartment, often used as a guesthouse, in-law suite, or rental unit. ADUs are becoming more popular because they can generate extra income, making them an attractive option for retirees looking to boost their savings.
Can You Qualify for a Residential Mortgage?
Yes, you can get a residential mortgage for a property with an ADU, but there are some things to know. Lenders typically view these properties as a mix of residential and investment use. If the ADU is small and doesn’t take up too much of the property’s value, you might still qualify for a standard residential mortgage.
However, if the ADU is large or generates significant rental income, lenders may treat the property as an investment. This could mean higher interest rates and stricter requirements. To qualify, you’ll need a good credit score, stable income, and a low debt-to-income ratio.
Do Mortgage Rates Differ for Investment Properties?
Mortgage rates for investment properties are usually higher than for primary residences. For example, while a primary residence might have a 6% interest rate, an investment property could have a 7% or 8% rate. This is because lenders see investment properties as riskier. If you’re retired and relying on fixed income, it’s important to factor these higher rates into your budget.
Benefits of Investing in a Property with an Accessory Unit During Retirement
Steady Passive Income
One of the biggest perks of having an ADU is the ability to earn rental income. For retirees, this can be a great way to supplement Social Security, pensions, or savings. Even a modest rental income can make a big difference in covering monthly expenses or funding travel and hobbies.
For example, if you rent out your ADU for $1,200 a month, that’s $14,400 a year. Over 10 years, that adds up to $144,000—enough to fund a dream vacation or pay for unexpected medical bills.
Tax Advantages
Rental income from an ADU can also come with tax benefits. You might be able to deduct expenses like property taxes, insurance, maintenance, and even depreciation. This can lower your taxable income and save you money at tax time.
What If the Rental Income Falls Short of Mortgage Payments?
If your rental income doesn’t cover the mortgage, don’t panic. You have options. First, consider raising the rent, if the market allows. Second, you could refinance your mortgage to get a lower rate or extend the loan term, which reduces monthly payments. Finally, you might use other income sources, like savings or investments, to cover the difference temporarily.
Challenges and Considerations for Retired Investors
Higher Mortgage Rates
As mentioned earlier, mortgage rates for investment properties are often higher. This means your monthly payments will be larger, so it’s crucial to budget carefully. For example, a $300,000 mortgage at 7% interest costs about $1,996 a month, compared to $1,799 at 6%.
Credit Implications
Yes, an investment property mortgage will appear on your credit report. This can affect your credit score and your ability to get other loans. If you’re retired and already have a mortgage on an investment property, adding another could stretch your finances. Make sure you’re comfortable with the added debt before committing.
Considering a Second Mortgage?
If you’re thinking about getting a second mortgage for another investment property, tread carefully. Lenders will look at your overall debt and income to decide if you qualify. Having too much debt could make it harder to get approved or lead to even higher interest rates.
Practical Tips for Securing and Managing Your Mortgage
Calculate Costs Accurately
Before buying a property with an ADU, calculate all the costs involved. This includes the mortgage payment, property taxes, insurance, maintenance, and any unexpected expenses. Use an online mortgage calculator to get a clear picture of what you’ll pay each month.
For example, if you’re borrowing $300,000 at 7% interest over 30 years, your monthly payment would be about $1,996. Add $300 for property taxes, $100 for insurance, and $200 for maintenance, and your total monthly cost is around $2,596.
Leverage Assets for Better Terms
If you have assets like stocks or bonds, you might use them as collateral to secure a better mortgage rate. For example, some lenders offer asset-based loans, where your investments serve as security. This can help you qualify for a lower rate or avoid a large down payment.
How Fast Can You Pay Down the Mortgage?
Paying off your mortgage faster can save you money on interest and give you more financial freedom. For example, making an extra $100 payment each month on a $300,000 mortgage at 7% could save you over $50,000 in interest and shave 5 years off the loan term.
By understanding the ins and outs of securing and managing a mortgage for a property with an ADU, retired investors can make informed decisions that align with their financial goals. Whether you’re looking for extra income, tax benefits, or long-term security, this investment strategy can be a valuable addition to your retirement plan.
FAQs
Q: If I’m buying a property with an accessory dwelling unit (ADU), will lenders treat it as a residential mortgage or an investment property mortgage, and how does that affect my interest rate and loan terms?
A: Lenders typically treat a property with an ADU as a residential mortgage if the ADU is used for family or personal purposes, but it may be considered an investment property if the ADU is rented out, which can result in a higher interest rate and stricter loan terms. Always clarify with your lender how they classify the ADU.
Q: Can I use rental income from the ADU to qualify for a residential mortgage, and how do lenders calculate or verify this income?
A: Yes, some lenders may allow rental income from an ADU to qualify for a residential mortgage, typically requiring a signed lease agreement or rental history to verify the income. Lenders often calculate this income by using a percentage (e.g., 75%) of the rental amount to account for potential vacancies or expenses.
Q: If I already have a mortgage on an investment property, will getting a residential mortgage for a property with an ADU impact my ability to secure a second mortgage?
A: Obtaining a residential mortgage for a property with an ADU should not directly impact your ability to secure a second mortgage, as lenders primarily evaluate your debt-to-income ratio, creditworthiness, and ability to repay. However, having multiple mortgages may affect your overall financial profile and borrowing capacity.
Q: What happens if the rental income from the ADU is less than expected and doesn’t cover the mortgage payment—will I still qualify for refinancing or other financial options?
A: If rental income from the ADU falls short and doesn’t cover the mortgage payment, lenders may still consider your overall financial stability, including your primary income and ability to make payments, when evaluating refinancing or other financial options. However, reduced rental income could impact your debt-to-income ratio and limit eligibility for certain programs or loan terms.