Once you’ve learned about Accessory Dwelling Units and expected ADU costs, you’re ready to tackle a crucial step: deciding how to build and finance a granny flat. Whether you’re building an ADU for family, securing rental income or creating extra space, making the financing for an ADU work is essential.

  • If you have equity in your house ⇒ best path would be a Line of Credit on the property
  • If you don’t have equity in your house, but your current loan value is less than $550K ⇒ a Homestyle Renovation Loan could cover the construction of the ADU by using the future value of the property with the ADU, up to a total loan value on the home of $880K (e.g. if you already have a $500K mortgage on the house, there is potential to get a $380K renovation loan for the ADU construction)
  • If you don’t have equity in your house but you have a FICO score of 720+ ⇒ you could consider a 2nd Position Construction Loan that will cover the building costs (and is not limited on loan value like the Homestyle option). Once the ADU is completed, you can refinance into a single loan.

Read on for more on each of these lending options, plus other paths for ADU financing in California. We’re happy to work with you and your lender to ensure you have the plans, scope of work, and budget required to submit for loan documentation on construction loans.

Best ADU financing options

Home Equity Line of Credit (HELOC)

A home equity line of credit is typically the simplest way to finance an ADU, though COVID has made HELOCs harder to come by. Primary residences can typically have up to 80-90% Loan-To-Value (“LTV”). So if your home is appraised at $700K and your current loan is only $400K, you could expect to access a credit line of $160K (80%*$700K= $560K-400K). A HELOC allows for flexibility, as you can draw down the credit line as you need the funds – you are only charged interest on the amount of credit used.

Renovation Loan (203K or Homestyle)

Renovation loans allow homeowners to finance a renovation project (including ADUs) into the mortgage. There are two types of renovation loans that can be used for ADU financing… FHA 203K allows for attached ADUs or conversions. Fannie Mae Homestyle allows for construction of detached ADUs. Both loans have a conforming limit of $880,000 and may be based on the “future value” of the property after adding the accessory dwelling unit, which will be based on appraisals (not rental income). Renovation loans typically offer up to 95% financing of a primary residence or 85% of an investment property.

Construction Loan

If you don’t have much equity in your home or already have a loan value close to the conforming limit of ~$880K, a construction loan could be a great option for ADU financing.  The construction loan will cover the building costs and then once construction is completed, the construction loan rolls into an adjustable rate mortgage (ARM), which means it is a refinance of your original mortgage. Loan amounts are from $150,00 and up, with interest-only payments during construction and no interest due until the line is actually drawn down once the project starts. These loans are available for owner-occupied properties and rental properties alike.

Cash-Out Refinance

A cash-out refinance replaces your existing mortgage with a new home loan for more than you currently owe on your house. The difference goes to you in cash that can be used on guest house construction or other renovation. You must have equity built up in your house to use a cash-out refinance. Limits are typically at 80-90% of your home’s equity (and more strict due to COVID). So if your home is worth $1M and you currently owe $600K… you could likely get a loan of up to $800-900K for a cash-out opportunity of $200-300K.

Home Equity Conversion Mortgage (HECM, ages 62+)

Also known as a reverse mortgage, an HECM is possible when at least one of the owners is 62 or older and the property is a primary residence. Owner can borrow up to 42% of home at age 62, all the way up to 70% at age 86 or older. Any existing loan would need to be paid off with the new one, and remaining money from the new loan can be used on the primary residence or on an investment property. The loan is structured as a line of credit and the borrower has access to the line with no fund control requirements (e.g. no construction draws required). Also, interest is tacked onto the balance of loan…so no debt service is due before or during construction.

Purchase and Construction Loan

Renovation loans can also be packaged with a loan for the purchase of a property. This is a great option for investors or new homeowners looking to buy an ADU-able property. For instance, the Homestyle loan is a 30 year fixed rate loan that can be used for purchase and construction. You can choose to refinance it after construction completion to get a better interest rate or different loan amount. Lenders will often handle this refinance without additional fees. Jumbo construction to permanent single-close construction loans are also available with up to 95% LTV.

How can I compare ADU loan options?

Looking for granny flat financing in San Diego? Use our ADU financing calculator to look at several different loan options, including Renovation Loans, HELOCs, and Cash-Out Refinance. You can include the estimated costs for your ADU that are based on our actual plans and prices. We want to help you get the numbers you need to make an informed decision on building and financing your ADU in California. If you don’t already have a lender, we are happy to put you in touch with experienced preferred providers we regularly work with on granny flat financing.

Compare ADU Loan Numbers

Yes, this is possible. The Fannie Mae Homestyle Conventional Renovation loan program can be used for purchase of a property and construction of a detached ADU. The loan amount may be based on the future value of the home, i.e. after adding the ADU. The max loan amount is $879,750 (Fannie Mae limit for 2022). Investment properties can be up to 85% financed, while primary residences may be up to 97% financed.

Here’s an example of “maxing out” that loan potential while building an ADU:

  • To max out the loan value, we’d be looking for a property with a future value of $1,035,000 (=$880K/85%) for an investment property… you could go over the limit, but would have to put in more cash
  • Let’s say you choose an ADU that has all-in costs of ~$350K
  • That leaves about $685K for the purchase of the property (=$1.035M-350K), if the investor didn’t want to pay for any construction costs out of pocket
  • The investor would be responsible for a down payment of ~$155K (=15%*$1.035M)

There are also refinance options available that count ADU income. As of June 2022, Freddie Mac is offering a program for 1-3 unit properties that have an ADU. This makes it possible to refinance (for instance, out of a construction loan) while factoring in the rental income from the ADU towards the value of the property. There is no seasoning period required, meaning you can initiate the refinance as soon as you have a rental contract signed for the ADU.

In our experience, we’ve found it to be sufficient to produce an intended floor plan and elevations, plus scope of work along with a budget that specifies the full construction costs. Fortunately, all of this information is provided in our Feasibility Report and is the first step of kicking off your ADU Design + Build with us.

After you submit the plans & budget to the lender, they will then order an appraisal, which will typically take into account the value of the “future state” of the property after adding the ADU. If a lender has worked with the contractor in the past, it can be a smoother process since the lender is familiar with the documentation & work of the builder.

If you are looking for a property to construct an ADU on, we suggest asking the seller for an extended due diligence period if possible. This allows you more time to research the feasibility of the project you intend to do (e.g. complete a feasibility report to understand any special site requirements that may affect project cost) to ensure you have enough financing for your ADU.

Additionally, we are unique in offering a Price Lock Guarantee after the Feasibility Study, which means you won’t need to worry about your price going up and not having sufficient ADU financing for the build.

Yes, we work with you and your lender to ensure you have the required plans, scope of work, and budget required to submit for loan documentation to get approval for a construction loan.

Once the project is started, we will also handle the coordination of the loan documents with the lender, including managing inspections and “draws” during construction. Draws are payments by your lender that are tied to construction progress milestones. Your construction loan balance will increase as the bank releases the loan funds to your contractor to pay for work completed this far. This means that you don’t typically pay interest on the entire amount of the loan upfront, but only on the portion “drawn down” thus far.

The California Housing Financing Agency (CalHFA) offers an ADU Grant Program that provides up to $40,000 to reimburse pre-development costs associated with the construction of an accessory dwelling unit, including site preparation, architectural designs, permits, soil tests, impact fees, property survey, and energy reports.

Who is eligible for the CalHFA ADU Grant Program?

Homeowners with low or moderate income are eligible for the program. Currently the household income limit in San Diego County is $211,000. The homeowner must apply for a construction loan with an approved CalHFA ADU Grant Program Lender.

In order to qualify, you must also live in and own the property where you are building the ADU.

What if I already paid for part of my ADU expenses?

The grant money cannot be reimbursed as cash if you already paid for costs before applying for the grant. But the grant amount can be applied to the loan value by your lender.

ADU Plans and Pricing

Check out our ADU floor plans for full pricing estimates on each model. We're big on transparency and want you to be prepared with the expected all-in cost for building your accessory dwelling unit so you can secure the right ADU financing as needed. It's never too early to bring us in to the conversation for a free consultation as you think through options.