Most California homeowners pay for an ADU with the equity in their home, through a HELOC, a home equity loan, or a cash-out refinance. If you don’t have much equity yet, a construction or renovation loan can lend against what your property will be worth once the ADU is built. FHA, Fannie Mae, and Freddie Mac programs can also count part of the ADU’s future rent toward your income. In Los Angeles, a garage-conversion ADU typically costs $120,000 to $150,000, and a new detached ADU runs $150,000 to $400,000, so the loan is a big decision. Here’s how each option works.
At GreatBuildz, we talk with homeowners about ADU financing every week. We’re a free service that matches California homeowners with vetted general contractors for ADUs and garage conversions. We aren’t lenders, so treat this as a starting point and confirm the details with a loan officer before you commit.
How Much Do You Need to Borrow?
Start with a real number for your project. In Los Angeles, a garage conversion to an ADU usually costs $120,000 to $150,000. A new detached ADU generally runs $150,000 to $400,000, or about $300 to $450 per square foot. Larger ADUs cost less per square foot, and a two-story ADU costs more because of the added structure. Costs in other parts of California differ, so get bids for your project before you size the loan. Our guide to the cost to build an ADU in Los Angeles has the full breakdown.
A garage conversion is the cheaper route because the walls, roof, and slab already exist. You still have to add the kitchen, bathroom, insulation, windows and doors, plumbing, electrical, heating and cooling, and a sewer connection, which is why it isn’t cheap.
Lenders will ask about the same things they would for any mortgage: your credit, steady income, savings, and how much equity you have. Ask yours for the full list early.
ADU Financing Options Compared
| Option | Based on | What to know | Best for |
|---|---|---|---|
| HELOC | Current equity | Draw as you go, pay interest only on what you use; rate is usually variable | Homeowners with equity who want to keep a low first mortgage |
| Home equity loan | Current equity | Lump sum, usually a fixed rate | A known budget and a preference for a fixed payment |
| Cash-out refinance | Current equity | Replaces your first mortgage with a larger one | Homeowners whose current mortgage rate is at or above today’s rates |
| Construction loan | Value after the ADU is built | Paid out in draws as work is inspected; needs plans, budget, and a permit | Homeowners without much equity yet |
| Renovation home equity loan | Value after the ADU is built | Borrow against the finished value, through partner lenders | Recent buyers with little equity |
| FHA 203(k), Fannie Mae HomeStyle, Freddie Mac CHOICERenovation | Purchase price plus project, or finished value | Combine a purchase or refinance with ADU construction in one loan | Buying a home and adding an ADU, or refinancing to build one |
| Personal loan | Your income and credit | Unsecured, faster, higher rate, smaller amounts | Filling a gap at the start or end of a project |
Home Equity Line of Credit (HELOC)
A HELOC keeps your existing mortgage in place and adds a credit line on top of it. Most lenders cap the total of your mortgage and HELOC at 80% to 90% of your home’s appraised value, and a few credit unions go higher. You draw money as you need it, which works well with a contractor’s payment schedule, and you only pay interest on what you’ve drawn.
The trade-offs: the rate is usually variable and can rise over time, and it’s often higher than a first mortgage. Terms vary by lender, from 10 to 30 years, sometimes with an interest-only period at the start. If you locked in a low rate on your first mortgage, a HELOC lets you keep it.
Home Equity Loan
A home equity loan, sometimes called a second mortgage, also taps your equity, but you get the full amount up front as a lump sum. The upside is that the rate is usually fixed, so your payment doesn’t change. The downside is that you pay interest on the whole amount from day one, even while the ADU is still being built. Rates are higher than a first mortgage, payback periods often run 5 to 15 years, and you’ll go through an appraisal and underwriting.
Cash-Out Refinance
A cash-out refinance replaces your current mortgage with a bigger one and gives you the difference in cash for construction. The maximum is usually about 80% of your home’s value. Because it’s a first mortgage, the rate is typically lower than a HELOC or home equity loan, and you can spread payments over 15 to 30 years.
It makes the most sense when your current rate is at or above today’s rates. If you have a low rate locked in, refinancing your whole balance to a higher one to pay for an ADU is usually a bad trade. Expect standard refinance costs: appraisal, title, and closing fees, plus full underwriting.
ADU Construction Loan
An ADU construction loan lends against what your property will be worth after the ADU is finished, not what it’s worth today. That’s why it works for homeowners who don’t have much equity yet. Lenders typically lend a percentage, often 80% to 95%, of the completed value, using their own appraisal.
Expect more paperwork than a home equity loan. You’ll usually need finished plans, a construction schedule, and a budget from a licensed, insured general contractor, and many lenders won’t fund until the building permit is issued. The money goes to your contractor in draws as work is completed, and the lender sends an inspector to confirm progress before each one.
During construction, which is often about a year, you typically pay interest only on what’s been drawn. Many construction loans then convert to a regular long-term mortgage. They take longer to close and cost more in fees than a HELOC, because the lender is doing more work.
Renovation home equity loans
A related option is a home equity loan based on your home’s after-renovation value. RenoFi, for example, is a broker that connects homeowners with credit unions offering loans from $25,000 up to $750,000, based on up to 90% to 95% of the after-renovation value. It doesn’t operate in every state, so check availability.
FHA, Fannie Mae, and Freddie Mac Renovation Loans
These programs let you roll ADU construction into a mortgage, either when you buy a home or when you refinance. Not every lender offers them, so you may need to shop around. They’re used for a primary residence, they come with extra paperwork on your contractor, plans, and budget, and the contractor is paid in draws like a construction loan.
FHA 203(k)
The Standard 203(k) loan can be used to build an eligible ADU. Down payments start at 3.5% with a credit score of 580 or higher, and the loan can’t exceed FHA’s limit for your county. It requires a HUD 203(k) consultant. The Limited 203(k), capped at $75,000, covers non-structural work only, so it won’t pay for a new ADU.
Fannie Mae HomeStyle Renovation
HomeStyle can fund adding an accessory unit, including a detached one, as long as it meets local code. Renovation costs can be up to 75% of the lesser of the purchase price plus renovation costs or the as-completed value. The total loan is capped by the conforming loan limit, which in high-cost counties like Los Angeles is $1,249,125 for 2026. Confirm with your lender that your ADU plan qualifies.
Freddie Mac CHOICERenovation
CHOICERenovation can fund a new ADU or convert a garage into one. First-time and moderate-income buyers who qualify for Freddie’s Home Possible or HomeOne programs can put down as little as 3%. Other buyers typically need 5% down on a single-family primary home.
Can You Use ADU Rental Income to Qualify?
Yes, with FHA, Fannie Mae, and Freddie Mac loans, within limits. All three now let lenders count part of the ADU’s expected rent toward your income on a single-family primary home with one ADU. The rules are similar:
- Only part of the rent counts. FHA and Freddie Mac count 75% of the rent. Fannie Mae reduces it by 25% for vacancy. On an FHA 203(k) with no rental history, only 50% counts.
- It’s capped. ADU income can’t be more than 30% of your total qualifying income.
- It’s for purchases and standard refinances. You generally can’t use it on a cash-out refinance.
- The ADU has to be legal. The appraiser confirms it can be rented, and the appraisal includes a rent estimate.
Other requirements, like cash reserves or landlord education for first-time landlords, vary by program. Ask your loan officer how they’ll treat the ADU income before you apply.
Grants and Local Programs
The CalHFA ADU Grant, which paid up to $40,000 toward predevelopment costs like plans, permits, and soil tests, is closed. Its last round was fully allocated, and no new round has been announced. CalHFA also warns that anyone claiming they can get you an ADU grant is running a scam.
A few cities run their own programs. Long Beach, for example, offers low-interest ADU loans to qualifying low-income homeowners in designated areas, with application rounds announced on the city’s website. Check with your city’s housing department.
One state rule helps everyone: ADUs of 750 square feet or less are exempt from impact fees, and larger ones are charged in proportion to the main house. That can take a real bite out of the budget.
Less Traditional Ways to Pay for an ADU
- Family loans. A loan from a relative can have flexible terms, and some homeowners repay it from the ADU’s rent. Put the terms in writing.
- Personal loans and credit cards. Unsecured personal loans for renovations often top out around $50,000 to $100,000 and carry higher rates. Credit cards cost even more. These make sense only for a short gap you can pay off quickly.
- Retirement accounts. If your plan offers loans, you can usually borrow the lesser of $50,000 or 50% of your vested 401(k) balance, repaid within five years. Taking a withdrawal instead can trigger taxes and penalties, so talk to a CPA first.
Is an ADU Worth the Loan?
For many homeowners, yes. Rent from the ADU can cover much of the loan payment, and an ADU adds flexibility for family, guests, or a home office. Whether it pencils out depends on your build cost, your financing rate, and local rents, so run the numbers for your property before you borrow. We cover this in more detail in our Los Angeles ADU rental guide.
If you’re still in the early stages, these guides help: building an ADU, JADUs, and financing other home improvement projects.
Frequently Asked Questions About ADU Financing
How do most people pay for an ADU?
Most homeowners finance an ADU with the equity in their home, through a HELOC, a home equity loan, or a cash-out refinance. Homeowners without much equity often use a construction loan or a renovation loan based on the finished value of the property.
How much does an ADU cost to build in Los Angeles?
A garage-conversion ADU typically costs $120,000 to $150,000, and a detached new-construction ADU runs $150,000 to $400,000, or roughly $300 to $450 per square foot. Knowing your total cost is the first step in choosing the right financing.
Can I get a loan for an ADU before it is built?
Yes. Construction loans and renovation loans are designed to fund an ADU before it exists, based on the projected value of the finished property. Home equity products, by contrast, are based on the equity you already have in your current home.
What is an ADU construction loan?
An ADU construction loan lends against what your property will be worth after the ADU is built. The lender pays your contractor in draws as work is inspected, you usually pay interest only during construction, and the loan often converts to a regular mortgage when the ADU is finished.
Can I use an ADU’s rental income to qualify for a loan?
Yes, with FHA, Fannie Mae, and Freddie Mac loans on a single-family primary home with one ADU. Only part of the expected rent counts, usually 75%, and ADU income can’t be more than 30% of your qualifying income. It generally can’t be used on a cash-out refinance.
Can I get an ADU loan with no equity?
Possibly. A construction loan or renovation loan based on the finished value of your property can work when you have little current equity. If you’re buying a home, an FHA 203(k), Fannie Mae HomeStyle, or Freddie Mac CHOICERenovation loan can combine the purchase and the ADU in one loan.
Free worksheet
Meeting contractors soon? Get a free worksheet for your ADU project
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Planning an ADU? GreatBuildz is a free service that matches California homeowners with three vetted general contractors, so you have real bids to take to your lender. Call us at 818.317.3567 or get matched here.
