Navigating ADU Financing: How to Secure Funds for Your Accessory Dwelling Unit


Unlocking the Potential of Your Property with ADU Financing

When it comes to how to finance an ADU, there are several straightforward options you can consider:

  1. Cash-Out Refinance: Replace your existing mortgage and pull out equity.
  2. Home Equity Line of Credit (HELOC): Borrow against your home’s equity with flexible repayment.
  3. Construction Loans: Finance your ADU based on its future value.
  4. RenoFi Loans: Leverage the after-renovation value of your home for more borrowing power.
  5. Personal Loans: Unsecured loans based on your creditworthiness.
  6. ADU Grants: Explore local and state grants specifically designed for ADUs.

Accessory Dwelling Units (ADUs) are gaining popularity across the United States, especially in big cities facing housing shortages. These small, additional housing structures on your property can solve various housing dilemmas, from accommodating extended family to generating rental income. But how do you navigate the complex world of ADU financing?

Securing the right funds for your ADU project is crucial. With options like cash-out refinances, home equity loans, HELOCs, construction loans, and specialized ADU financing programs, you can turn your vision into reality. Choosing the right financing not only makes your project feasible but can also optimize your investment returns.

I’m Michael Kootchick, a seasoned real estate developer with years of experience in how to finance an ADU. With my background in multifamily housing and property management, I’ve guided many homeowners through successfully financing their ADU projects, ensuring they reap the maximum benefits.

Ready to explore these options further? Let’s dive in.

ADU Financing Options - how to finance an adu infographic pillar-5-steps

Understanding Different ADU Financing Options

How to Finance an ADU with Home Equity

Home Equity Line of Credit (HELOC)

A HELOC allows you to borrow against the equity you have in your home. Think of it as a credit card with a borrowing limit based on your home’s equity. You can draw funds as needed, which makes it flexible for ongoing construction costs. However, the interest rates are typically variable, which means they can increase over time.

Home Equity Loan

A Home Equity Loan provides a lump sum upfront, which can be helpful if you have a clear budget for your ADU project. The interest rate is usually fixed, offering stability in your monthly payments. However, you might face higher rates compared to your primary mortgage.

Using Cash-Out Refinance for ADU Financing


A Cash-Out Refinance involves replacing your current mortgage with a larger one, allowing you to pull out the equity difference in cash. This can be advantageous because it often comes with lower interest rates compared to other loan types. Additionally, you might be able to reduce your overall monthly payments by locking in a lower rate.


On the downside, a Cash-Out Refinance resets your mortgage term, which could mean paying interest over a longer period. It also requires sufficient home equity, typically allowing you to borrow up to 80% of your home’s current value.

Innovative Financing: RenoFi and Construction Loans

RenoFi Loan

RenoFi Loans are designed specifically for renovation projects like ADUs. These loans consider the future value of your home after the ADU is built, allowing you to borrow more money than traditional home equity loans. With fixed rates and flexible options, RenoFi Loans can bridge the gap between your current borrowing power and the funds you need.

Construction Loan

Construction Loans are short-term loans that cover the cost of building your ADU. These loans usually come with higher interest rates and require detailed plans, schedules, and budgets. You’ll need to work closely with your lender, contractor, and often a HUD inspector to manage the payout schedule.

Exploring Grants and Special Loans for ADUs


The California Housing Finance Agency offers various programs to help homeowners finance ADUs. These programs often come with lower interest rates and favorable terms, making them an attractive option for California residents.

Local Programs

Many local governments and nonprofits offer grants or low-interest loans to encourage ADU construction. These programs can vary widely, so check with your local housing authority or community development office to see what’s available in your area.

Personal Loans

If traditional financing options aren’t suitable, personal loans can be a quick way to secure funds. While they usually come with higher interest rates, they don’t require home equity, making them accessible even if you haven’t built up significant equity in your home.

ADU Grants

Some regions offer grants specifically for ADU projects. These grants can cover a portion of your construction costs and don’t need to be repaid. However, they often come with specific eligibility criteria and application processes.

Understanding these various financing options can help you choose the best method for funding your ADU project. Whether you leverage home equity, opt for a specialized loan, or tap into local grants, the right choice will depend on your financial situation and project goals.


How to Choose the Right Financing Option for Your ADU

Choosing the right financing option for your ADU project is crucial. It ensures that you can comfortably manage your finances while achieving your goals. Here are the key steps to help you make an informed decision.

Evaluating Your Financial Situation

Assessing Needs

Start by understanding your financial needs. Ask yourself:

  • How much will the ADU cost?
  • How much can you afford to borrow?
  • What is your monthly budget for loan repayments?

Credit Score

Your credit score is a significant factor. A higher credit score can get you better loan terms and lower interest rates. Check your credit report and work on improving it if needed. Pay off any outstanding debts and avoid applying for new credit before seeking an ADU loan.

Home Equity

If you own your home, you may have built up equity. Home equity can be a valuable resource for financing your ADU. The more equity you have, the more borrowing power you possess.

Debt-to-Income Ratio (DTI)

Lenders will look at your DTI ratio to assess your ability to repay the loan. A lower DTI ratio is favorable and can make it easier to qualify for financing. Aim to keep your DTI ratio below 43%.

Project Costs and Expected Returns


Get detailed estimates from contractors to understand the total cost of your ADU project. This includes materials, labor, permits, and any extras. Having a clear budget helps you determine how much you need to borrow.

Comparing Options

Explore different financing options:

  • HELOC and Home Equity Loans leverage your home equity.
  • Cash-Out Refinance allows you to refinance your mortgage and take out cash.
  • RenoFi Loans and Construction Loans are tailored for renovation projects.

Compare interest rates, terms, and fees. Use mortgage calculators to see how different options affect your monthly payments.

Future Value Financing

Consider how the ADU will increase your property’s value. Some loans, like the RenoFi Loan, base the loan amount on the future value of your home after the ADU is completed. This can provide more funds for your project.

ROI (Return on Investment)

Think about the potential return on investment:

  • Rental Income: If you plan to rent out the ADU, calculate the expected rental income. In high-demand areas like California, ADUs can significantly boost your income.
  • Property Value Increase: ADUs can increase your property’s value by up to 35% in some markets. This can be a long-term financial benefit.


Evaluating your financial situation and understanding the costs and returns of your ADU project are essential steps in choosing the right financing option. By assessing your needs, comparing options, and considering future value, you can make a well-informed decision that supports your goals and enhances your financial stability.

Next, we’ll discuss the steps to securing an ADU loan, including preparation, application process, and required documentation.


Steps to Securing an ADU Loan

Determining Your Loan Amount

First things first: figure out your budget.

Start by talking to your financial advisor about your financial goals and constraints. This will help you understand how much you can afford to borrow. Next, get 3-4 estimates from local contractors based on your ADU wish-list. These quotes will give you a clear picture of the project costs.

Here’s a quick checklist:
– Talk to your financial advisor.
– Get multiple contractor estimates.
– List all potential costs (materials, labor, permits, etc.).

This information will help you determine the loan amount you need.

Finding the Right Lender

Researching lenders is crucial. Get referrals from friends and family to reputable lenders in your area. You can also leverage networks like RenoFi, which connects you to credit unions offering competitive rates.

Steps to finding the right lender:
1. Gather Referrals: Ask people you trust for recommendations.
2. Use Online Tools: Utilize mortgage calculators to get a ballpark figure of how much you can borrow. RenoFi’s Loan Calculator is a good example.
3. Compare Rates: Look at different lenders and their rates. Consider any discounts or special programs they offer.
4. Check Policies: Understand each lender’s policies and requirements.

Credit Unions often provide better rates for ADU loans, so don’t overlook them.


Before you apply for a loan, gather all necessary documentation. This will help streamline the application process.

Required Documentation:
2 Most Recent Pay Stubs
2 Years of W-2 Forms
Proof of Homeowners Insurance
Most Recent Mortgage Statement
Statements for Personal Bank, Retirement, and Investment Accounts
Contractor Information
Detailed Cost Estimate for Appraisal
Renovation Plans (blueprints, drawings, contracts, etc.)

Application Process

Once you have all your documentation ready and have chosen a lender, you’re set to apply. The application process generally involves filling out forms and possibly paying an application fee. Be prepared to answer questions to verify your information.

Application Steps:
1. Fill Out Forms: Complete the application forms from your chosen lender.
2. Submit Documentation: Provide all the required documents.
3. Pay Application Fee: Most lenders charge a fee for processing your application.
4. Answer Questions: Be ready for follow-up questions from the lender.

Pro Tip: Keep copies of all your documents and correspondence for your records.

By following these steps, you’ll be well on your way to securing the funds needed to build your ADU. Next, we’ll tackle common questions on how to finance an ADU, including the best loan types and saving on construction costs.


Common Questions on How to Finance an ADU

What Type of Loan is Best for an ADU?

When it comes to financing your ADU, the best loan type depends on your specific situation. Here are some popular options:

1. Home Equity Line of Credit (HELOC):
A HELOC allows you to borrow against your home’s equity. You can withdraw funds as needed, and you only pay interest on what you borrow. It’s a flexible option but comes with variable interest rates.

2. Home Equity Loan:
This loan provides a lump sum upfront, which can be perfect if you have a clear budget for your ADU project. The interest rate is usually fixed, providing stability but often at a higher rate than a HELOC.

3. Cash-Out Refinance:
With a cash-out refinance, you replace your existing mortgage with a new one that’s larger than the amount you owe. The difference is given to you in cash, which you can use for your ADU. This option can offer lower interest rates but resets your mortgage term.

4. RenoFi Loan:
RenoFi loans are unique in that they factor in the future value of your home after the ADU is built. This can significantly increase your borrowing power. They are ideal for homeowners who may not have enough equity but have a solid future value projection.

5. Construction Loan:
These short-term loans cover the cost of building your ADU. They usually have higher interest rates and require detailed plans and budgets from a licensed contractor. They convert to a permanent mortgage once the project is completed.

How to Get a Loan for an ADU in California?

California offers several options and incentives for ADU financing:

1. CalHFA ADU Grant:
The California Housing Finance Agency (CalHFA) provides grants to help with ADU construction. These grants can cover pre-development costs like site prep and permits.

2. Local Programs:
Many cities in California, like Los Angeles and San Diego, have local incentives and grants for ADU projects. Check your local government’s website for available programs.

3. Equity Loans:
Leveraging your home’s equity through a HELOC or home equity loan can be a straightforward way to finance your ADU. These loans are widely available and can be easier to qualify for if you have substantial home equity.

4. RenoFi Loans:
Given California’s high property values, a RenoFi loan can be particularly advantageous. By considering the future value of your property, you can borrow more than traditional equity loans might allow.

5. Cash-Out Refinance:
This is another viable option in California, especially if your property has appreciated significantly. It allows you to tap into your home’s increased value to fund your ADU.

Is Adding an ADU a Good Investment?

Adding an ADU can be a smart investment for several reasons:

1. Return on Investment (ROI):
In high-demand areas like California, homes with ADUs can be priced up to 35% higher than similar homes without them. Depending on rental income and project costs, you could see an ROI of 5-10%.

2. Rental Opportunities:
ADUs provide an excellent source of rental income. Whether it’s long-term tenants or short-term rentals like Airbnb, the additional income can significantly offset your mortgage or construction costs.

3. Long-term Value:
Aside from immediate rental income, an ADU can increase the overall value of your property. This makes your home more attractive to future buyers and can lead to higher resale prices.

4. Flexibility:
An ADU can serve multiple purposes—housing family members, creating a home office, or providing a private space for guests. This flexibility adds to the appeal and functionality of your property.

Pro Tip: Always conduct a thorough cost-benefit analysis before starting your ADU project. Consider factors like construction costs, potential rental income, and long-term property value increases.

Next, we’ll dive into the detailed steps to securing an ADU loan, from determining your loan amount to finding the right lender.



Financing an ADU can seem overwhelming, but with the right approach, it becomes manageable and even exciting. Whether you’re looking to create a rental income stream, provide housing for family members, or simply add value to your property, understanding how to finance an ADU is the first step towards achieving your goals.

Final Thoughts

Adding an ADU to your property is a significant investment, but it’s one that can pay off in multiple ways. From boosting your property value to generating rental income, the benefits are substantial. The key to a successful ADU project lies in choosing the right financing option that suits your unique circumstances.

Encouragement to Act

Don’t let the complexities of financing hold you back. Take the time to explore different financing options, assess your financial situation, and plan your project carefully. With proper planning and the right resources, your ADU dream can become a reality.

OneStop ADU

At OneStop ADU, we simplify the entire process from start to finish. Our comprehensive services include property evaluation, design and planning, permitting, and construction. We even offer assistance with financing, connecting you with experienced local lenders who can help you secure the best rates.

Ready to get started? Explore our backyard house plans and designs to find the perfect ADU for your needs. Let OneStop ADU be your partner in creating a flexible, valuable, and sustainable living space.

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By choosing OneStop ADU, you’re not just building an accessory dwelling unit; you’re investing in a brighter, more flexible future for you and your family. Contact us today to learn more and take the first step towards your dream ADU.


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