The Ultimate Orange County ADU Financing Guide

ADUs, or Accessory Dwelling Units, are second dwellings on residential lots. As California has greatly simplified ADU building restrictions, these ADUs have garnered much attention in California and Orange County. Southern California homeowners and investors are developing ADUs and garage conversions in droves.

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.

How Should You Finance an ADU?

Depending on location and specifications, garage conversion to ADU costs $90,000–$125,000. A new Orange County ADU costs $100,000–$400,000, depending on size, location, access, etc. The bigger the ADU, the lower the cost per square foot. Assume about $300-$400 per square foot for standard construction.

ADU/Garage Conversion Loans

ADU loans have comparable terms to home loans.

The bank will ask: Are you creditworthy? Can you demonstrate continuous income? Any savings/investment accounts? Are you home-equity-rich? Ask your lender what else they need for your ADU or garage conversion financing.

Fortunately, more lenders are now offering ADU loan programs. Let’s look at Orange County’s most frequent ADU financing choices and some “untraditional” ones:

adu garage conversion


A HELOC loan may be a suitable way to finance an ADU in Orange County if you have a mortgage but have built up equity as property values have risen. A Home Equity Line of Credit allows you a second mortgage in the form of a credit line while keeping your original mortgage in place.

The lender will likely offer you 80-90% of your home’s assessed worth minus your mortgage balance.

Like a credit card, the HELOC is a revolving credit line that lets you take and repay any amount at any time. You only pay interest on the amount you take. HELOC loans are fast and affordable with low closing charges.

Compare your alternatives because this loan may have a higher interest rate and a variable rate that may rise over time. This loan can last 10–30 years, interest-only or amortized, depending on your lender.

Home Equity Loan

home equity loan

A second mortgage, or home equity loan, can finance an ADU or other big remodeling project. The homeowner uses equity above their original mortgage, comparable to a HELOC.

Home Equity Loans provide you with the whole amount upfront. The drawback is paying interest on the entire loan (unlike the HELOC). Advantage: the fixed interest rate.

Home equity loans always have a higher interest rate than your initial mortgage and a 5-15-year payback term. This loan normally requires appraisal, credit checks, and other underwritings like a conventional mortgage. With a HELOC, your financing will depend on your home’s equity.

HELOCs and HELOANs are increasingly appealing when interest rates rise. If your mortgage rate is low, you may not want to refinance it. You may preserve your low rate and add a smaller, higher-rate “second mortgage” using these options. Renofi offers innovative loan plans for $25,000–$500,000 with periods of up to 20 years and fixed terms. Interestingly, Renofi works with lenders who may finance based on your home’s “post-construction” worth, not its present value, which can be valuable.

Cash-Out Refinance

cash out refinance

ADU cash-out refinances are also beneficial. A cash-out refi replaces the previous mortgage with a new one and uses some of your home equity to pay for development.

Refinancing for a larger amount is comparable to a regular mortgage refinance. This will help you pay off your debt and fund your remodel, ADU, or garage conversion.

Cash-out refinances, like other ADU financing solutions, need home equity. Refinancing up to 80% of your home’s worth is typical.

Orange County ADU financing can be an excellent option with a cash-out refi for various reasons. It’s like a typical refinancing, so you’ll probably receive the best possible rate.

Refinancing has a 30-year loan term (with 15 or 20-year choices), so your monthly payment should fit your budget. Renting your ADU may help you afford a 15- or 20-year mortgage.

Other ADU loan considerations. Refinance fees include an appraisal, title, closing, etc. The lender will verify your credit, taxes, income, and more during “underwriting.”

Renovation Loan

An ADU renovation loan can finance a garage conversion or ADU. These are Personal loans without any collateral requirement. These Income-based loans are faster and easier to get than property-based loans.

These loans are usually limited to $100,000. As the loan is not secured by the property, it will have a higher interest rate and a shorter payback time.

This ADU loan is fast and easy. SoFi, Lightstream, and your local bank or lender may provide this sort of option.

Construction Funding

construction funding

Construction loans can also finance ADUs. This loan is more difficult than the some from above and requires more work. Construction loans are 80-95% of your ADU’s “finished value.” Your lender’s underwriter will assess your project’s worth and lend accordingly.

This loan is generally a one-year loan with a somewhat higher interest rate.

A qualified, insured general contractor must prepare your drawings, schedule, and budget to qualify for this ADU financing. The lender won’t fund the financing without a building permit.

When the loan is approved/funded, the lender will only pay the contractor in “draws” based on their progress, which will be checked in person by a bank inspector.

Due to the lender’s extra labor, ADU construction financing will take longer and cost more in lender and closing costs.

This loan will likely just require monthly interest payments. After one year, the construction loan should automatically convert to a 30-year, fixed- or variable-interest loan.

FHA/Fannie Mae Loans

FHA Loans

FHA and Fannie Mae provide distinct ADU and remodeling financing. Fannie Mae offers HomeStyle loans while FHA offers 203k loans. If one of these programs fits your scenario, you may need to seek out a lender that provides it. OC residents can choose one of these two ADU financing choices.

The 203k and Homestyle loans are unique in that they fund both the purchase of a property and the expenditures of upgrading, adding an ADU, or converting your garage. This may be a fantastic alternative for someone who wants to buy a house and immediately remodel it.

These loans are reasonably generous because FHA or Fannie Mae guarantee them.

They may lend up to 97% of the home’s value plus 75% of the “additional” value from upgrades or ADUs. Check your local loan limitations.

These loans resemble construction loans. Compared to traditional loans, the interest rate and closing expenses would be greater. The lender will also request contractor, architectural, and budget information.

Submitting drawings and acquiring a building permit are usually required within 30 days of closing. If work takes longer than 6 months, these loans can be extended. Your new loan starts monthly payments immediately.

If you can’t reside in your house during the remodeling, you can delay mortgage payments by financing for a few months. Construction loans and contractor draws are similar.

Freddie’s Choice Renovation Mortgage

New update for this year! Freddie Mac simplifies their ADU financing. First-time buyers can get ADU construction financing with 3% down using the ADU future rent payments.

Recently, Freddie Mac allowed rental income from an accessory dwelling unit (ADU) on a single-family principal house to qualify for a loan/mortgage.

Freddie now offers mortgages for duplex or triplex buildings with one ADU. Only single-family ADU financing existed before. A home-and-ADU loan is a significant new option.

First-time buyers without having owned a house in three years can build an ADU with a 3% down payment using the Freddie’s Choice Renovation Mortgage. Other purchasers must put down 5%.

The down payment is based on either the property’s completion worth or the sales price + project cost.

Other Options For Financing an ADU

other loan options

Family and Friends Loan: You can borrow money to build an ADU from close friends or family. If you rent the ADU, you may pay down the debt monthly. You and your lender may choose the loan period, interest rate, repayment plan, and more.

Credit Card: These loans have hefty interest rates and might damage your credit score if not repaid. If you need temporary funds to start or finish a project and can pay it back quickly, they may be a viable alternative.

Retirement Accounts: If you’re old enough to take payouts, consider a lump sum. For tax liabilities, consult a CPA or tax specialist. Borrow from your retirement savings. Certain retirement accounts let you borrow up to 50% of the funds, with limits. To avoid tax penalties, prepare ahead for loan payback.

Most folks in Orange County and Southern California will qualify for one of the several ADU financing plans above. Visit our blogs. Learn more about…

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 (818.839.6855) to chat with a real person about financing your ADU or renovation project or visit our website for more information:


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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