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 work is essential.

  • If you have equity in your house ⇒ best path would be a Line of Credit on the house
  • 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 $753K (e.g. if you already have a $500K mortgage on the house, there is potential to get a $250K 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 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.

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 $753,000 and may be based on the “future value” of the property after adding the ADU, 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 ~$753K, 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 ADU 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+)

Applicable 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.

Find out what financing option makes sense for your ADU project

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.

Compare ADU Loan Numbers

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 ADU 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.