ADU financing: how to pay for an ADU in California

Start with the price. Snap ADU's published San Diego prices, as of March 2026, run about $300,000 for a 500-square-foot detached ADU and about $350,000 for 750 square feet, before city fees and unusual site work. See what an ADU costs in San Diego or run your own numbers in the ADU cost calculator, then pick the loan that fits that number.

ADU financing options compared

Sources: the CFPB, Fannie Mae, Freddie Mac and HUD. The SDHC loan for City of San Diego owners who agree to affordable rents is covered in our guide to ADU grants in California.

Financing an ADU with home equity

HELOC for an ADU

A HELOC is a revolving line of credit secured by your home. You can draw up to your limit during a draw period, which might last 10 years, and then you stop borrowing and repay. Rates are usually variable, so payments can change. If your home's value drops a lot, the lender can stop further draws. That matters on a build that takes a year: line up the full amount before you sign a construction contract.

The fit with a construction schedule is the HELOC's strength. You draw for each milestone as it's finished and pay interest only on what you've drawn.

Home equity loan

With a home equity loan you borrow the whole amount up front and repay it in regular monthly payments. You get a predictable payment, but interest starts on the whole amount at closing, even while most of it sits waiting for later milestones.

Cash-out refinance for an ADU

A cash-out refinance replaces your current mortgage with a larger one and pays you the difference, usually with closing costs. The CFPB's advice is to weigh the new rate carefully, especially if it's higher than your current one. It makes sense if today's rates are near or below your current rate. If you locked in a low rate years ago, refinancing the whole balance to fund the ADU can cost far more than a HELOC on top of it.

Renovation loans for an ADU

If you don't have enough equity, a renovation loan bases the amount on what the property will be worth after the ADU is built. Fannie Mae says owners buying or refinancing a one-unit home can use a renovation loan to “construct or install a new ADU.”

Fannie Mae HomeStyle Renovation

• Cost cap: on a refinance, renovation costs can't exceed 75% of the as-completed appraised value. On a purchase, 75% of the lesser of price plus renovation costs or the as-completed value.
• Soft costs count: permits, architect and engineering fees, inspections and draw fees can go into the loan.
• Escrowed funds: renovation money sits in an escrow account and is released only as work is completed, by joint check or by wire with your written consent each time.
• Deadline: work must be done within 15 months of closing, with extensions possible to 18 months.
• Licensed builders: the work must be done by licensed contractors, apart from any approved do-it-yourself items.

Freddie Mac CHOICERenovation

Freddie Mac says CHOICERenovation can be used when buying or refinancing to “add a new ADU or renovate an existing ADU,” including converting a garage, barn or shed. The ADU must be legally permitted under local zoning. In California, state law makes most ADUs legal by right; see California ADU laws.

Does FHA 203(k) cover ADUs?

Yes, with conditions. HUD's Mortgagee Letter 2023-17 added ADUs to the improvements allowed under the Standard 203(k) program, and HUD lists building an eligible ADU as an allowed use. Ask an FHA 203(k) lender whether your specific design, especially a detached unit, qualifies before you pay for plans.

ADU construction loans

A construction loan for an ADU is a short-term loan paid out in draws as the build progresses, typically followed by a refinance or conversion into a permanent mortgage. Banks and credit unions set their own terms, so compare the draw schedule, inspection fees and what happens at conversion as carefully as the rate. Fannie Mae's construction-to-permanent product is aimed at building a new house with an ADU at the same time, not adding one to a house you already own. For a backyard ADU on an existing home, a renovation loan or HELOC usually does the same job.

Using ADU rental income to qualify

Lenders can count rent from an ADU, but the rules are narrower than most people expect. Under Fannie Mae's current guide:

Freddie Mac allows ADU rent on a one-unit primary residence for purchases and no-cash-out refinances, also limited to 30% of stable monthly income and based on 75% of lease or market rent. FHA counts ADU rent too, under the 2023 rules.

The catch: these rules mostly help when you buy or refinance a home that already has an ADU. To fund a new one, you'll usually qualify on your current income. Expected rent still matters for your own budget; see ADU rental income in San Diego.

Matching draws to the build

California law caps a home improvement contractor's down payment at $1,000 or 10% of the price, whichever is less, and bars them from asking for or taking payment that exceeds the value of the work done. The state treats ADU construction as home improvement, so these rules apply to your ADU.

Your loan's draw schedule should mirror the contract's payment schedule. The Contractors State License Board's sample ties each payment to a finished stage:

Fannie Mae lets a lender release up to 50% of planned renovation costs at closing for items like permits and architect fees. That doesn't change what a California contractor may collect. A lender can pay out a large sum at once; the contractor still can't take it ahead of the work. Before each draw, collect a conditional lien release; see how to hire an ADU contractor.

Contractor-arranged loans

Multitaskr, a Chula Vista ADU company, ran financing in house for its clients. Nearly 100 San Diego County homeowners say it took out loans totaling $15 million in their names; one owner says more than $900,000 was borrowed under his name for ADUs at two properties that weren't finished. The state revoked Multitaskr's license in 2025.

• Choose your own lender, and compare at least two.
• Make sure draws are paid by joint check or with your written sign-off each time, after an inspection.
• Read every page you sign. A loan is in your name even if the builder filled out the forms.
• Check a contractor's license before you sign anything, or start from our list of verified ADU builders in San Diego.

Monthly payments on ADU loans

This is a simple ADU loan calculator in table form: monthly principal and interest at sample rates. They aren't quotes; use your lender's rate.

Add property tax on the new construction. In San Diego County only the ADU is added to your assessed value; the existing home isn't reassessed. Not ready to borrow? A junior ADU or a garage conversion usually costs far less.

Common questions