What Are the Best ADU Financing Options in California?

 

If you’re planning to build an accessory dwelling unit, the biggest challenge isn’t design or permits — it’s figuring out how to finance your ADU in California without draining your savings or refinancing your first mortgage at today’s higher rates.

The good news? In 2025, more lenders are offering ADU-specific loan options — and the right choice depends on your equity, income, and how soon you plan to build.

Let’s break down the most common ADU financing options for California homeowners:

 

1. HELOC (Home Equity Line of Credit)

 

A HELOC is a revolving credit line based on your home’s equity — great for staged ADU builds or if you’re still finalizing plans.

Best for: Homeowners with at least 20% equity who want flexibility and interest-only payments.

Pros:

• No need to refinance your mortgage

• Only borrow what you need, when you need it

• Often interest-only during the draw period

Cons:

• Variable interest rates

• Can reset to full amortization later

• Approval limits vary by county (usually 80–90% CLTV)

Pro Tip: If you’re planning a detached ADU and want to spread out draws by milestone (design, permits, build), a HELOC gives you breathing room.

 

2. Cash-Out Refinance

 

A cash-out refi replaces your existing mortgage with a larger one — and you pocket the difference to fund your ADU.

Best for: Homeowners with a low mortgage balance who don’t mind adjusting their current loan.

Pros:

• Fixed interest rates

• One payment for everything

• Can increase loan size if ADU will boost value

Cons:

• Replaces your current mortgage (at today’s rates)

• Higher closing costs

• May restart your 30-year clock

Pro Tip: If your mortgage is nearly paid off and you want a simple lump sum for your ADU, this may work — but don’t use it just because it’s easy.

 

3. Construction-to-Permanent Loan

 

This ADU-friendly loan gives you money in stages during construction and then converts into a regular 30-year mortgage once the build is done.

Best for: Homeowners starting from scratch with plans, permits, and a licensed builder.

Pros:

• Interest-only during construction

• Converts to fixed 30-year loan when done

• Some lenders allow future ADU rent to help you qualify

Cons:

• Requires full ADU plans, budget, timeline, and builder

• Approval takes 3–6 weeks

• Draws must be documented and inspected

Pro Tip: This is the most complete loan product for serious ADU builders. We can walk you through the process start to finish.

 

4. Fannie Mae HomeStyle® Renovation Loan

 

A traditional mortgage + renovation loan that lets you finance your ADU based on future value, and even use projected rental income.

Best for: Homeowners with good credit and modest renovation plans.

Pros:

• Can use up to 75% of future ADU rent to help qualify

• Single-close mortgage

• Ideal for conversions or attached ADUs

Cons:

• Requires upfront appraisals and builder contracts

• Not all lenders offer it

• Max LTV is typically 95%

 

5. Freddie Mac CHOICEReno eXPress®

 

This simplified renovation loan supports up to $75,000 in improvements — great for garage conversions or small JADUs.

Best for: Homeowners with mid-tier credit (540+) doing low-cost builds.

Pros:

• Lower credit score requirements

• No mortgage insurance if LTV is below 80%

• Less documentation than full renovation loans

Cons:

• Lower loan limits

• May not work for full-size detached ADUs

• Must be owner-occupied

 

6. FHA 203(k) or Title I Second Mortgage

 

Government-backed loans that allow you to renovate or add an ADU with flexible credit and income guidelines.

Best for: Borrowers with limited equity or slightly lower credit scores.

Pros:

• 203(k) allows you to wrap in ADU costs

• Title I doesn’t require equity in the home

• Low down payment requirements

Cons:

• FHA loans require mortgage insurance

• Lower loan caps than conventional

• 203(k) has slower processing time

7. Second Mortgage (Fixed-Rate 2nd)

 

A second mortgage (sometimes called a home equity loan or “HELOAN”) lets you borrow against your home’s value without touching your first mortgage. You get a lump sum and repay it over 10–30 years at a fixed rate.

Best for: Homeowners with equity who want predictable monthly payments and want to preserve their low first mortgage rate.

Pros:

• Keeps your current mortgage intact

• Fixed rate, fixed payment

• Funds released all at once — no draw schedule

• Some lenders allow for construction-related use

Cons:

• Higher rates than first mortgage loans

• May cap at 85–90% CLTV (combined loan-to-value)

• Monthly payment starts right away

Pro Tip: This is one of the most popular ways to finance ADUs in 2025 — especially if you refinanced in 2020–2021 and don’t want to give up your 2–3% first mortgage rate.

 

Which ADU Loan Is Right for You?

 

There’s no one-size-fits-all answer — the best ADU financing option depends on:

• Your current mortgage balance & rate

• How much equity you have

• The size and cost of your ADU

• Whether it’s detached, attached, or a conversion

• How soon you want to start building

That’s why we offer personalized ADU financing plans — tailored to your budget, timeline, and local zoning rules.