ADU Financing
How to Finance an ADU In Los Angeles & Ventura County
Financing an ADU project in California requires understanding your loan options, estimating project costs, and ensuring your financing plan covers the entire construction process. Whether you’re building an ADU for rental income or to accommodate family, securing the right financing goes beyond just finding a loan—it’s about making sure your loan matches the full, all-in costs of the build.
As an ADU design-build company, we often see homeowners caught off guard by unplanned expenses that weren’t included in the initial budget. That’s why having a clear, comprehensive budget is crucial when securing financing. The last thing you want is to lock in a loan only to discover it won’t cover critical expenses like site work, permits, or utility connections.
This guide, built from a builder’s perspective, is here to help you navigate the ADU financing process. We’ll walk you through planning your budget for a successful build, reviewing various financing options, the steps to secure an ADU loan, and answering common FAQs. By understanding the full scope of your project and aligning your loan with your financial needs, you can avoid surprises and ensure a smooth ADU build from start to finish.
Budgeting for an ADU Project
Careful budgeting is essential for any ADU project to avoid unexpected costs during construction. By fully understanding all expenses—such as sitework, utility connections, construction, finishes, design, and permitting—you can ensure your project stays within your financial limits.
It’s important that your ADU design fits your budget, not the other way around. Discuss any budget constraints early in the design phase to prevent expensive revisions later.
Begin with a rough estimate that includes both construction and pre-development costs like architectural designs, permits, and site preparation. This initial estimate will serve as a foundation for financing discussions. From there, refine the estimate through the Feasibility process, where your ADU builder will assess all potential hidden costs specific to your project.
Best ADU Financing Options
Home Equity Loan
A home equity loan, or HELOC, is usually the easiest way to finance an ADU, though current rates are higher than usual. For primary residences, Loan-To-Value (LTV) ratios typically range from 80-90%. For example, if your home is valued at $700K and your current mortgage is $400K, you could access a credit line of $160K (80% of $700K is $560K, minus the $400K loan balance). A home equity loan offers flexibility, as you can draw from the credit line as needed and are only charged interest on the amount you use.
Fixed Rate Second Position Loan
Want to keep your current mortgage rate? A newer loan product is available that’s based on your home’s value after adding the ADU (“after renovation value”). This option doesn’t require refinancing your existing loan and offers terms up to 20 years. Unlike construction loans, there are no “draws,” and you receive the full loan amount upfront. Once the renovation is complete, an appraiser will issue a certificate of completion. Learn more about fixed rate second position loan options.
Construction Loan
If you don’t have significant home equity, a construction loan may be a great option for financing your ADU. This type of loan covers the construction costs and then converts into an adjustable-rate mortgage (ARM) once the ADU is complete, effectively refinancing your original mortgage. During construction, payments are interest-only, and no interest is due until funds are drawn as the project progresses. These loans are available for both owner-occupied and rental properties.
Portfolio Lending
If you’re an investor looking to add ADUs to your property, new loan options are emerging. One exclusive offering for Alto ADU customers is a bridge loan specifically designed for investment properties. This ADU construction second lien loan provides a key benefit: it’s not limited by your current equity.
Although it comes with a higher interest rate and origination fee, this bridge loan is intended for short-term use. The strategy is to refinance with a traditional loan once the ADU construction is completed.
Second Position Bridge Loan Details:
Max Loan-to-Cost (LTC): 80%
Term: 12 months, with a 3-month extension option
Payments: Interest-only payments
Origination Fee: 2% of the loan amount (minimum $10,000)
Funding Requirements: Permits must be obtained before funding
Personal Guaranty: Required, with a minimum FICO score of 720
Please note that loan terms and availability may vary depending on lender policies and individual qualifications. Alto Builders is not a licensed financial advisor or lender, but we can connect you with our trusted lending partners to find the right financing solution for your ADU project. Contact us for more information.
Why does it cost so much to build an ADU?
We often are asked why Accessory Dwelling Unit building costs seem higher when compared to a Single Family Residence (SFR) on a cost per square foot basis. In short, the answer is that SFRs are often twice the size of an ADU, resulting in a lower price per square foot. ADUs have a higher cost per square foot because they bear many of the same “fixed” costs of any residential building project.
Whether building an ADU or a SFR, there are certain base costs which occur no matter the size of the structure.
These include:
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Design & Construction Documents: Relatively speaking, drafting hours and costs are in the same ballpark for an ADU or a basic SFR. An ADU still requires a full set of building plans… even pre-approved plans are not something you can walk into a building department as-is; they must be customized to your property.
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General Conditions: Dumpsters, temporary toilets, project supervision, and site protection are required regardless of the build size and will be part of your ADU costs.
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Kitchen, Bath & Laundry: Kitchens are the most expensive room of a building, including cabinets, countertops, plumbing & sink, plus appliances. Bathrooms and laundry facilities are also costly with plumbing & finish materials. A small one bedroom ADU still needs a kitchen and a bathroom, while a modest SFR might need just an additional bath yet support 4X the square footage.
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Vendors: Whether a vendor is installing a small amount of material for an ADU or a large amount for a SFR, there is a base cost for simply showing up and setting up their tools.
Thus, there is a minimum base cost to build a residential unit, no matter how small the unit may be. That means that an ADU cost per square foot can be as high as $500+ for very small units.
Read more about how to compare ADU quotes. Looking to go a more DIY route to save money? Consider an unfinished shell ADU, where you complete the finish work yourself and save.
Steps to Securing an ADU Loan
When securing financing for your ADU project, it's important to understand the loan process from start to finish. The following steps will guide you through obtaining an ADU loan, ensuring you have the necessary documentation and meet lender requirements.
1. Assess Your Financial Situation
Before applying for an ADU loan, evaluate your financial status. Check your credit score, gather income verification documents, and consult a financial advisor if needed. Understanding your financial health will help determine your borrowing potential and identify any areas for improvement before applying. This will also guide you toward loan programs for which you may qualify. If your family is helping with the ADU costs, consider reviewing our ADU Guide for Families for important title-related considerations.
2. Get Ballpark Costs for Your ADU Project
Consult an experienced ADU contractor early in the process to get a rough estimate of project costs. This helps establish your budget without diving into specific design details yet. The goal is to gauge how much you can borrow or pay and ensure your design aligns with your financial limits.
3. Get Referrals and Explore Options
Seek ADU lender referrals from trusted sources such as financial advisors, contractors, or homeowners who have built ADUs. They can direct you to reputable lenders and help you avoid common pitfalls. For non-owner-occupied properties, explore private money lending options, including bridge loans, which don't require equity and are based solely on the project's total cost. Contact us to learn more about private loan options for your ADU project.
4. Choose the Right ADU Loan Program
Research various ADU loan programs, including construction loans, home equity loans, and renovation loans. Consider factors like interest rates, loan terms, and fees. At Alto Builders, we focus on building your ADU, but we recommend speaking with multiple lenders to compare options and choose the best loan program for your needs.
5. Prepare Your Preliminary Loan Application
Gather the necessary documentation for your loan application, including income verification, credit score details, and financial records. Early in the application process, lenders focus on verifying your financial eligibility. ADU-specific details will be evaluated later, so it's essential to have your personal financial documents in order.
6. Kick off ADU Design & Feasibility
Once you’ve received initial financing approval, begin your ADU feasibility study and design process. Select a licensed builder with ADU experience, as lenders will require contractor information and project specifics. A Feasibility Study will assess your project’s viability and provide detailed construction costs needed for the loan. This phase also moves you toward securing construction permits. Learn more about finding the right ADU company.
7. Appraisal and Loan Approval
As your project approaches the permitting stage, your loan details will be finalized. For construction loans, lenders will typically order an appraisal to estimate your property’s future value with the completed ADU. Submitting documents like a floor plan, elevations, a detailed scope of work, construction budget, and payment timeline is usually sufficient. If the appraisal aligns with expectations and your financials are in order, the loan will be approved, and the funding process can begin.
8. Loan Disbursement and Monitoring
After loan approval, funds will be disbursed based on your loan program. For HELOCs, funds might be released in one lump sum, while construction loans are disbursed in stages, known as draws, tied to construction milestones. Lenders may require inspections to verify the progress, releasing funds at each stage to ensure the project stays on track.
Calculate your Loan Amount here
Renovation Loan (203K or Homestyle)
Renovation loans allow homeowners to finance a renovation project, including ADUs, as part of their mortgage. Fannie Mae Homestyle loans, for example, support the construction of detached ADUs and have a conforming loan limit of $977,500. These loans are often based on the “future value” of the property after the ADU is added, determined by appraisals (not rental income). Renovation loans typically offer up to 95% financing for a primary residence or 85% for an investment property. They can also be combined with a loan for purchasing a property.
Cash-Out Refinance
A cash-out refinance replaces your current mortgage with a new one that exceeds what you currently owe, giving you the difference in cash to fund your ADU construction or other renovations. You must have equity in your home to qualify for a cash-out refinance, with limits typically ranging from 80-90% of your home’s equity. For example, if your home is worth $1M and you owe $600K, you could potentially refinance for $800-900K, leaving you with $200-300K in cash for your project.
Home Equity Conversion Mortgage (HECM, ages 62+)
Also known as a reverse mortgage, an HECM allows homeowners 62 or older to borrow against their primary residence. Borrowers can access up to 42% of their home’s value at age 62, increasing to 70% at age 86 or older. Any existing mortgage must be paid off with the HECM, and the remaining funds can be used for home improvements or investment properties. This loan operates as a line of credit with no fund control requirements, meaning no construction draws are necessary.