How to finance an ADU in California

Why ADUs Are Growing in Popularity in California

Accessory Dwelling Units, or ADUs, are becoming one of the most popular ways for California homeowners to increase property value and generate rental income. With the state facing a major housing shortage, California laws now support easier permitting and faster construction timelines for ADUs. This has made it much more appealing to add a unit in your backyard or convert a garage into a rental space.

But building an ADU isn’t cheap. Whether it’s a detached unit or an interior conversion, costs often range from $100,000 to $300,000. That’s why financing is such a critical part of the process—and why choosing the right lender can make all the difference. At LBC Mortgage, we help homeowners access tailored loan options that align with their financial goals, property type, and long-term investment strategy.

CalHFA ADU Grants Can Jumpstart Your Project

One of the best starting points is the California Housing Finance Agency’s ADU Grant Program. It provides up to $40,000 to cover pre-development costs like architectural plans, permits, soil testing, and site prep. Unlike a loan, this is not something you repay. It’s a true grant, and it’s designed to help reduce the upfront burden of starting your project.

Because funding is limited and demand is high, it’s essential to apply early. We guide our clients through the application process and ensure that documentation meets CalHFA standards. Combining this grant with a low-interest loan gives you a smart financing strategy that keeps your out-of-pocket expenses manageable.

Construction Loans and Cash-Out Refinancing

Construction Loans Provide Flexible Funding for Ground-Up Builds

If you’re building a new structure from the ground up, a construction loan may be your best option. These loans release funds in stages—typically tied to the completion of specific milestones like laying the foundation, framing, and final inspections. Once the ADU is completed, the loan converts into a standard mortgage, which spreads the repayment over 15 or 30 years.

Construction loans require detailed plans, licensed contractors, and a strong credit profile. At LBC Mortgage, we walk you through these steps, helping you secure fast approvals and competitive rates.

Cash-Out Refinancing Unlocks Equity in Your Home

For homeowners who already have equity in their property, a cash-out refinance offers a straightforward way to fund an ADU. This approach replaces your current mortgage with a larger one, and you receive the difference in cash. The funds can then be used for any part of your ADU project—from design to construction.

This option works best when interest rates are favorable or when your current mortgage rate is higher than market average. We analyze your current loan and long-term goals to determine if this move is right for you.

Home Equity Loans and HELOCs

Home Equity Loans Offer Fixed Rates and Stability

A home equity loan gives you a lump sum with a fixed interest rate and predictable monthly payments. This is ideal if you want the security of knowing your costs won’t change. The loan is secured by your home, so interest rates are often lower than personal loans or credit cards.

HELOCs Offer Flexibility and Access to Funds Over Time

A Home Equity Line of Credit, or HELOC, works more like a credit card. You borrow only what you need and pay interest during the draw period. This option is great for homeowners who want to pay as they go and only borrow when necessary.

Both loan types depend on how much equity you have in your home. Most lenders require at least 15 to 20 percent equity to qualify. LBC Mortgage helps you calculate your available equity and choose the best path forward.

FHA Loans Make ADU Financing More Accessible

New FHA Guidelines Include ADU Rental Income

Recent changes from the Federal Housing Administration have made ADU financing more attainable. FHA loans now allow projected rental income from an ADU to count toward your qualifying income. If your ADU already exists, you can use up to 75 percent of the actual rental income. For new ADUs, lenders may count up to 50 percent of the projected rent.

This shift in policy makes it easier for more homeowners to qualify for FHA-backed financing. We’re experienced in navigating these guidelines and work closely with appraisers who understand how to properly value ADUs under FHA rules.

FHA 203(k) Loans Cover Renovations and Additions

The FHA 203(k) loan is another powerful option. It allows you to finance both the mortgage and the renovation costs—including ADU construction—under a single loan. This is ideal if you plan to buy a fixer-upper and add an ADU, or if you want to build one on your current property.

VA Loans Offer 100% Financing for Qualified Veterans

Veterans and active-duty service members may qualify for a VA loan, which allows you to finance a home with an ADU at up to 100 percent of the home’s value. While VA loans don’t always count rental income from ADUs, some lenders do allow it with the right documentation.

If you’re a veteran considering an ADU project, we’ll help you find lenders who offer VA loans with ADU flexibility.

Personal Loans and Credit Cards for Short-Term Needs

While not the best long-term financing method, personal loans and credit cards can fill temporary funding gaps. These unsecured loans don’t require home equity but typically come with higher interest rates. They may be useful for covering minor costs like permit fees, utility connections, or finishing touches.

We always advise using these options sparingly and only when lower-cost alternatives are not available.

Choosing the Right Financing Strategy

There’s no one-size-fits-all answer when it comes to ADU financing. Your best option depends on how much equity you have, your credit score, the type of ADU you’re building, and your timeline. At LBC Mortgage, we take the time to understand your goals and recommend the most cost-effective and efficient financing plan.

We also assist with grant applications, appraisals, and contractor coordination to ensure a smooth experience from start to finish.

How to Finance an ADU in California: Loan Options, FHA Guidelines and Tax Benefits