Welcome to Part 14 of our comprehensive DSCR Loan Video Guide: All About ADUs: Accessory Dwelling Units (ADUs) in DSCR Loans

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All About ADUs: Accessory Dwelling Units (ADUs) in DSCR Loans

Accessory Dwelling Units (ADUs) are rapidly growing in popularity across residential real estate and are becoming an increasingly important strategy for real estate investors. An ADU, sometimes referred to as an accessory apartment, casita, or in-law suite, is a smaller, secondary dwelling located on the same parcel as a primary single-family home. According to conventional definitions (e.g. Fannie Mae), a qualifying ADU is a self-contained unit with its own (1) Private Entrance (ingress/egress) 2) Kitchen (sink with running water, cabinets, working stove or hookup), 3) Sleeping Area and 4) Bathroom (including shower facilities). To qualify as a true ADU, the secondary unit must also be subordinate in size to the main home and offer independent access and functionality.

There has been a recent surge in ADU adoption, likely driven by two key forces: housing shortages in high-growth and land-constrained metro areas (e.g. Austin, Texas and Los Angeles, California) and stubbornly high home prices and interest rates which make every incremental dollar of rental income more valuable to investors seeking positive cash flow and stronger returns

DSCR Loans are well-positioned to support this evolving strategy. Unlike conventional lenders bound by rigid agency underwriting (Fannie Mae, Freddie Mac), many DSCR lenders adapt more quickly to investor needs, especially for newer and emerging strategies such as single-family homes with ADUs. Most DSCR Lenders allow financing for &single-family residences (SFRs) with one legal ADU. However, properties with multiple ADUs, or 2–4 unit buildings with an added ADU, are typically ineligible for DSCR Loans.

Where DSCR Lenders vary significantly is in how the ADU is treated during qualification and underwriting, particularly in the specific methodology used to calculate key metrics such as the DSCR and LTV ratios as well as property type classification (i.e. SFR or Duplex), all of which can significantly affect eligibility, qualification and pricing (i.e. rates and terms).

👀📺In This Video, We will cover:

➡️What are ADUs? (or Accessory Dwelling Units)

➡️The 4️⃣Part Definition of a "Qualifying ADU"

➡️The Two Key Forces 📈📈driving the surge in ADUs

➡️🏘️Property Type Classification for ADUs financed with DSCR Loans

🤔ADU FAQ 1: Is a property with an ADU considered a Single-Family or Duplex for a DSCR Loan?

➡️💰🏠Valuation Methodology for ADUs financed with DSCR Loans

🤔ADU FAQ 2: Does the value of the ADU count in the appraisal and LTV for a DSCR Loan?

➡️💵🏠Rental Income Methodology for ADUs financed with DSCR Loans

🤔ADU FAQ 3: Can rental income from the ADU be used in the DSCR ratio for a DSCR Loan?

➡️DSCR Loan Eligibility for Properties with Unpermitted 😦 ADUs

🤔ADU FAQ 4: Does ADU value and rental income count when its unpermitted for a DSCR Loan?

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