ADU Financing Guide for Homeowners – Updated for 2023

Which ADU Financing Option is Right For You?

Have you been hearing a lot about ADUs lately? An ADU, otherwise known as an Accessory Dwelling Unit, is as a second unit on a residential lot in addition to the main house (or main multifamily building)–and they’ve been getting a lot of press lately. Why? Well, the state of California recently drastically relaxed the laws around building ADUs, creating a boom of interest in building ADUs and garage conversions by Southern California homeowners and property investors.

Are you curious about building one on your own property? If so, you might be wondering how to pay for it. To help you out, we’ve put together this guide to ADU financing Los Angeles, exploring a variety of options you can consider for how to finance an ADU, from refinancing to different types of ADU loan. Let’s dive in.

Here at GreatBuildz, a free service that connects homeowners in Los Angeles, Orange County, Ventura or San Diego with reliable general contractors, we get inquiries every day about ADU financing in Los Angeles & Southern California – here are some key points you need to know. If you’d like to learn about financing options for other projects, check out my Home Improvement Financing Guide.

Key Takeaways

  • ADU and garage conversion expenses differ based on size and options, ranging from $75,000 to $125,000 for garage conversions and $100,000 to $400,000 for new ADUs in Los Angeles.
  • Given the substantial costs, financing becomes crucial. Several options include a Home Equity Line of Credit (HELOC), Home Equity Loan, Cash-Out Refinance, Renovation Loan, Construction Loan, FHA & Fannie Mae Loans, and Freddie’s Choice Renovation Mortgage.
  • HELOC is a flexible choice, offering a credit line based on home equity. While it’s quick and cost-effective, it may have a variable interest rate and a higher rate than other loans.
  • Considered one of the best options, cash-out refinance replaces the first mortgage, providing cash for construction. It often offers lower interest rates, especially if your current mortgage rate is higher.
  • FHA and Fannie Mae provide unique offerings like the 203k Loan and HomeStyle loan, allowing financing for both home purchase and renovation costs.
  • An update for 2023, the Freddie’s Choice Renovation Mortgage program makes it easier for first-time buyers with as little as 3% down payment, allowing qualification with ADU rental income.
  • Alternative options include ADU loans from family and friends, credit cards, personal loans, and even borrowing from retirement accounts. Careful consideration is needed due to potential high interest rates and the impact on credit scores.

ADUs and garage conversions will vary greatly in cost based on the size and options you choose, but you can be certain it’s a sizeable expense. This is a major construction project where you are essentially building a complete home, albeit smaller in size.

Converting a garage into an ADU is the most cost-effective option because the major components already exist, but you still need to add many interior components, such as:

  • Walls
  • Kitchen
  • Bathroom
  • Flooring
  • Windows/doors
  • Plumbing
  • Electrical
  • HVAC
  • Insulation
  • All utilities, including a sewer line that will need to connect to the sewer lateral in the front yard

The cost for a garage conversion to ADU will range between $75,000 and $125,000, depending on location and finishes. Costs to construct a new ADU in a Los Angeles unit can also vary based on size, location, access, etc., but will generally range from $100,000 to $400,000. A good rule of thumb is to assume $250-$400 per square foot – and keep in mind the larger the ADU, the lower the cost per square foot.

Also, if you’re building a 2-story ADU, costs will go up because of the structural support required for the 2nd story. Because the costs to build these secondary units are significant, many homeowners will need to consider financing and loan options for this project.

Can I get a loan for ADU construction? The answer is likely yes! The requirements to qualify for an ADU loan are similar to those needed when you buy a home.

The bank or lender will want to know the following:

  • Do you have reasonably good credit?
  • Can you show them a steady income?
  • Do you have any savings/investment accounts?
  • Do you have equity in your home?

Talk to your lender to get a full list of the items they will require for your ADU or garage conversion loan.

There are a number of options worth considering based on your specific situation, and fortunately, more and more lenders are starting to offer ADU loan programs. Let’s explore the most common ADU financing options in Los Angeles and even a few ‘untraditional’ options:

ADU Financing

Home Equity Line of Credit (HELOC)

Assuming you have an existing mortgage on your home but you’ve also built up some equity in your home as prices have gone up, a HELOC loan may be a good option for you to finance an ADU in Los Angeles.  With a Home Equity Line of Credit, you keep your original mortgage just as it is, but the bank essentially gives you a second mortgage in the form of a credit line.

The lender will likely be willing to loan you an amount based on the following calculation: 80-90% of the appraised value of your home minus what you owe on your existing mortgage.

The HELOC is a revolving credit line structured similarly to a credit card: you can withdraw as much or little of the loan at any time and pay it back anytime, and you only pay interest based on the amount you have withdrawn. Usually, a HELOC loan is relatively quick and cheap to accomplish with minimal closing costs.

However, this loan may come with a higher interest rate than other loans and with a variable interest rate that may go up over time, so make sure to compare your options. Also, depending on your lender, the term of this loan can range from 10-30 years, either interest-only or fully amortized.

Home Equity Loan

A Home Equity Loan is a good ADU financing option (as well as for any other large-scale renovation project) and is sometimes known as a second mortgage. It’s somewhat similar to a HELOC in that the homeowner is tapping the equity in their home above what is owed on their first mortgage.

The difference with a Home Equity Loan is that you receive the entire amount of the loan right away in a lump sum. The downside to this is having to pay interest on the full amount of the loan (unlike the HELOC). The upside is the interest rate can be fixed rather than variable.

Home Equity Loans will always have a higher interest rate than your primary, first mortgage, and will have a payback period that typically ranges 5-15 years. Also, this loan will usually require a similar underwriting process to a standard mortgage with appraisal, credit checks, etc.  And just like a HELOC, the amount of financing you qualify for will be based on a calculation of how much equity you have in your home.

With interest rates rising, A HELOC or a Home Equity Loan (HELOAN) has become even more attractive. You aren’t likely to want to refinance your entire mortgage if you currently have a low interest rate. These products let you keep your low rate and tack on a smaller ‘second mortgage,’ albeit with a higher rate. Renofi has some interesting programs for loans between $25,000 and $500,000 with terms up to 20 years and fixed terms options available. Renofi’s differentiator is they work with lenders who can provide you a loan based on the ‘post construction’ value of your home, rather than its current value.

Cash-Out Refinance

The cash-out refi is another good ADU loan option.  A cash-out refi replaces the first mortgage with a new mortgage and extracts some of your equity in the home as cash that can be used to pay for construction.

The process is very similar to a traditional mortgage refinance, but instead of refinancing for the exact amount of your current mortgage, you would refinance for a higher amount. This will be used to both pay off your existing loan and provide you additional cash for your renovation, ADU, or garage conversion project.

Just like other types of ADU financing options discussed above, a cash-out refi requires that you’ve built up some equity in the value of your home. So the maximum amount of your refinance will usually be about 80% of the value of your home.

A cash-out refi is considered one of the best options for ADU financing in Los Angeles for several reasons. Because it’s very similar to a traditional refinance, you are likely to get the best possible interest rate.

If your current mortgage interest rate is higher than today’s current rates, this loan is an opportunity to reduce your rate. Also, a refinance comes with a traditional loan term of 30 years (with other available options like 15 or 20 years), so it’s likely your monthly payment can stay within your budget.

If you’re planning on renting your ADU, you might consider using this rental income to pay for a higher monthly mortgage payment associated with a 15 or 20-year mortgage.

A few other things to consider with this ADU loan option.  You can expect to pay the standard types of fees with a refinance like an appraisal, title, closing fees, etc. Also, you’ll have to go through a full ‘underwriting’ process where the lender will check your credit, taxes, income, etc.

ADU Financing

Renovation Loan

Another way of financing an ADU or garage conversion is by using an ADU renovation loan. These loans are personal loans that are not secured by your property.  They are quicker and easier to secure than more traditional loans and are based on your income qualifications and not property value/equity.

Usually, the amount of these loans has been limited to about $100,000.  Also, because the loan is not secured by the property, it will come with a higher interest rate and a shorter payback period.

This form of ADU loan is good for those looking for speed and simplicity. A few lenders that offer this type of program are SoFi and Lightstream, but you can also ask your local bank or lender if they have similar options.

Construction Loan

Another option for ADU financing is a construction loan. This loan is a bit more complicated than the traditional products above and will require more work on your part. A lender will provide you with a construction loan in an amount that is a percentage (80-95%) of the “completed value” of your ADU.  Your lender will have their own underwriter to determine the value of your completed project and lend based on that.

This loan is usually a short-term loan (approx. one year) and may come with a somewhat higher interest rate than a conventional loan.

In order to qualify for this type of ADU loan, you will need to provide the lender items like your completed plans, schedule, and budget created by a licensed, insured general contractor.  Usually, the lender will not fund the loan until you also have a building permit in hand.

Once the loan is approved/funded, the lender will only release payments to the contractor in chunks (called “draws”) based on their progress, which will be verified in person by an inspector working for the bank.

You can expect this type of ADU financing to take longer to process and cost more in the various lenders and closing fees because of the additional work required of the lender.

During the term of this loan, you will likely just pay interest on the amount outstanding each month. At the end of the one-year construction loan period, this loan should automatically convert to a long-term, permanent loan of 30 years, which may be at a fixed or variable interest rate.

ADU Financing

FHA & Fannie Mae Loans

FHA and Fannie Mae have some unique offerings for ADU and renovation loans. FHA has a financing program called the 203k Loan, and Fannie Mae’s program is called a HomeStyle loan. Not every lender offers these programs, so it may take a bit of searching to find the right lender if one of these programs is a fit for your situation.

The 203k loan is only available for a primary residence. We’ve noticed these two are very popular ADU financing options among homeowners in LA.

The 203k and Homestyle loans are unique as they allow you to finance both the purchase of a home and the costs of remodeling, building an ADU, or converting your garage in one single loan.  This is a potentially good option for someone who intends to purchase a home and immediately undertake some construction or remodeling.

Because these loans are guaranteed by government agencies (FHA or Fannie Mae), the loan amounts can be generous.

Specifically, they may allow you to borrow up to 97% of the value of the home and up to 75% of the value of the ‘additional’ value coming from the renovations or ADU. But there are loan limits that depend on where you live, so make sure to check on these maximums.

These types of loans are most similar to construction loans discussed above.  The interest rate is likely to be slightly higher than average and there will be additional closing costs relative to a conventional loan. Also, the lender will require you to provide them with information on your chosen contractor, architectural plans, budgets, etc.

Generally, you will have to start the project within 30 days of closing, beginning with submitting plans and getting your building permit. These loans usually allow six months for the completion of work, but extensions are available if there are delays. Your monthly payments on your new loan will begin right away.

However, if you can’t live in your home during the project, you can finance a few months of payments into the mortgage to defer the start of payments. The draw process to pay the contractor is the same as a construction loan.

Freddie’s Choice Renovation Mortgage

New update for 2023! Freddie Mac makes it easier to finance ADUs. First-time buyers can qualify for an ADU construction loan with as little as 3% down and use rent payments in the underwriting.

It’s now much easier to qualify for a mortgage to cover the construction costs of an accessory dwelling unit, also known as an ADU. Freddie Mac announced on June 1 that rental income from an accessory dwelling unit (ADU) on a single-family primary residence may be used to qualify for a loan/mortgage.

Freddie also expanded its mortgage offerings to include the purchase or refinance loans for one ADU on duplex or triplex properties. Previously, only single-family ADU funding was available. A combination loan covering the purchase of a home and the construction of an ADU is a big new opportunity.

The Freddie’s Choice Renovation Mortgage enables first-time buyers who have not owned a home within the past three years to build an ADU with as little as a 3% down payment. Other buyers who have bought a property within the last three years must put down 5%.

The down payment calculation is based on the lesser of 1) the property’s completed value or 2) the sales price plus the project cost.

Less Traditional Forms of ADU Financing

  • Family and Friends Loan: If you have close relationships with people who are willing to loan you some or all the money to build an ADU, this is a potential financing option. If you plan to rent the ADU, you might commit to repaying the loan from your rental income every month. Also, you and your lender have total flexibility to decide on the terms of the loan, interest rate, repayment schedule, etc.
  • Credit Card or Personal Loan: These types of financing options should be used carefully because they come with high ADU loan rates of interest and the potential to hurt your credit score if not paid back diligently. These might be a good option if you just need some temporary cash to start or finish out a project and plan to pay this back in a reasonably short timeframe.
  • Retirement Accounts: If you are old enough to take distributions, you might consider whether taking a lump sum is a viable alternative. You’ll want to consult with a CPA or tax expert to understand any tax liability. Another option may be to borrow from your retirement account.  Some retirement accounts allow you to borrow up to 50% of the total funds in the account but with certain maximums. You will have to pay back the loan to prevent any tax penalties, so plan out how you’ll make these repayments upfront.


Sure, they can cost a pretty penny, but the good news is that it will probably all be worth it in the end. Building an ADU can offer a compelling return on investment (ROI) for homeowners, making them a financially savvy addition to residential properties. Here’s how.

  • Rental income: By renting out the ADU, homeowners can generate a steady stream of revenue that helps offset construction costs and provides long-term financial benefits.
  • Flexibility: Whether used for multigenerational living, hosting guests, or as a home office, ADUs add versatility to a property, potentially increasing its overall market value.
  • Resale value: The rise in demand for alternative housing solutions and the trend towards remote work further amplify the attractiveness of ADUs.
  • Financial incentives: Some regions offer financial incentives, tax breaks, or grants for ADU construction, further sweetening the ROI.

As property values tend to appreciate over time, homeowners stand to benefit from the increasing worth of their ADU-equipped property.

What Now?

With so many options for ADU financing in Los Angeles & Southern California, most people will find that one of these programs is a good fit for them. Check out our various blogs If you want to learn more about…

If you’d like to learn more about how to finance a home addition or other home renovation project, check out this home addition blog. The type of loan program that’s best for you will depend on the extent and cost of your project.  Building a new home will require a different financing plan than remodeling a kitchen, etc.

When it comes to planning and financing an ADU or remodel for your home, you shouldn’t have to go it alone – GreatBuildz can help simplify your renovation experience. GreatBuildz is a free service in Los Angeles, Ventura & Orange County that connects homeowners in Los Angeles, Orange County, Ventura or San Diego with reliable, thoroughly screened general contractors and provides project support from start to finish.


Call now (818.317.3567) to chat with a real person about financing your ADU or renovation project or visit our website for more information:

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Hi, we're Paul and Jon - Co-Founders of GreatBuildz. We believe everyone deserves to find a great contractor, have a stress-free renovation, and enjoy their beautiful new space. There are so many contractors out there and it's often hard to tell the good from the bad... until it's too late. We started our company to help simplify your contractor search and help you have a stress-free renovation experience. We're always available to help, no matter where you are in the process. Click here to learn more about our story.

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