What Are the Best Loan Programs for ADUs in California (San Diego Guide)?

What Is an ADU, and Why Are They So Popular in California?

An ADU is a secondary housing unit built on the same lot as a primary home, often used for multigenerational living, rental income, or increasing property value. Many California property owners are turning to ADUs—sometimes called backyard cottages, garage conversions, or internal ADUs—as a flexible way to create additional living space or an income-producing rental. ADU construction has surged due to streamlined statewide zoning regulations, simplified building permit processes, and the urgent need for more affordable housing. In 2022 alone, homeowners built nearly 21,000 ADUs, representing 17% of all new housing statewide—a major indicator of their growth (Scotsman Guide). According to CalHFA, ADUs help “ease the housing shortage” by adding fast, cost-effective units to existing neighborhoods (CalHFA). Typical ADU construction costs range from $100,000 to $300,000, depending on size, design, and whether the project involves a garage conversion, basement apartment, or new detached structure (RenoFi).

Detached backyard cottages are popular because they add flexible living space without changing neighborhood character—ideal for rentals or multigenerational use.

How Much Does It Cost to Build an ADU in California (and San Diego)?

What Are the Typical ADU Costs?

Building an ADU in California varies widely based on size, finishes, and site conditions, but statewide research provides clear benchmarks that help property owners plan effectively. The median cost to build an ADU is about $150,000, according to a statewide ADU owner survey by the Terner Center for Housing Innovation at UC Berkeley (Terner Center). Most ADU projects fall within a $100,000–$300,000 range, which aligns with homeowner-reported data and financing analyses across California and reflects typical ADU plans, building materials, and building code requirements.

In San Diego specifically, construction tends to be more expensive due to higher labor and materials regulated by local zoning regulations and building permit requirements. Detached ADUs often range from $300–$450 per square foot, especially when properties require utility upgrades, grading, or more complex site preparation supervised by a licensed construction contractor.

What Rental Income Can an ADU Generate?

ADUs are increasingly popular because they can create meaningful monthly rental income, helping homeowners offset construction costs or a future monthly loan payment. Across California, typical ADU rents average $1,900–$2,300 per month, based on homeowner financing insights and rental analyses from renovation and lending platforms such as RenoFi (RenoFi). This rental range makes ADUs a potentially high-ROI investment—whether used for long-term tenants, multi-generational living, or housing for family members—especially in high-demand markets like San Diego where demand for affordable accessory dwelling units continues to rise.

Finish level drives cost swings—set a specs budget early because upgrades during the build are the fastest way to push a project past the $100K–$300K range.

What Are the Best Loan Programs for Building an ADU in California?

California homeowners have multiple financing options for building an ADU, and the best choice depends on available equity, household income, and project scope. Below is a skimmable breakdown of the most common and effective ADU loan types—similar to programs supported by various local municipalities and ADU initiatives statewide. As Urban Institute housing expert Laurie Goodman notes, “Financing remains a real obstacle to the success of this product, even in states and localities where zoning and regulatory barriers have been largely eliminated.” (Urban Institute)

1. Home Equity Loan

A home equity loan is a strong option for homeowners with substantial existing equity. These loans offer fixed interest rates and a single lump-sum payout, making them predictable for budgeting ADU construction and easier for long-term project management. They also leave the existing primary mortgage untouched, which benefits homeowners focused on owning your home with stable monthly payments.

2. HELOC (Home Equity Line of Credit)

A HELOC provides a flexible, revolving line of credit, ideal for ADU projects completed in phases—such as the design process, building permit application, and construction draws. HELOCs are widely used in California because they allow homeowners to borrow only what they need and pay interest accordingly, offering versatility for projects that evolve as building plans are refined.

3. Cash-Out Refinance

With a cash-out refinance, homeowners replace their existing mortgage with a new, larger one and take the difference in cash to fund construction. This can increase borrowing capacity and consolidate financing into one monthly payment. However, most lenders do not count future ADU rental income when qualifying applicants, which limits loan amounts even when the ADU will be used as an income-producing rental.

(See Laurie Goodman’s commentary on restrictive income rules in the Scotsman Guide.)

4. Construction Loans

Construction loans are designed specifically for new building projects, whether a detached unit or a garage conversion. These loans release funds in stages (draws) as the ADU is built and may convert to a permanent mortgage when construction is complete. They are especially useful for homeowners with limited equity, since qualification is often based on the completed appraised value of the home once the ADU and all required inspections are finished.

5. Renovation Loans (FHA 203k, Fannie Mae Homestyle)

Renovation loans remain one of the most accessible ADU-friendly financing tools because they base borrowing limits on the after-improved value of the property. This allows homeowners to access more funding than a standard equity-based loan, making them ideal for ADU construction in Santa Cruz, the County of Napa, or other ADU Supportive Jurisdictions where project costs may exceed current equity. These loans also allow financing for the entire construction process in one mortgage—helpful for homeowners seeking a streamlined solution.

For larger builds, get a lender-approved draw schedule early so your contractor and inspections stay aligned with funding releases.

Are There Any Government ADU Loan or Grant Programs in California?

Yes — California offers several government-backed programs to help homeowners finance ADU development, with the most significant being the CalHFA ADU Grant Program. Although funding is currently paused, the program played a major role in expanding affordable accessory dwelling units by covering essential pre-development expenses that often create financial barriers for homeowners in both incorporated cities and unincorporated county areas. These grants helped property owners move forward with ADU construction even before securing a loan through an Accessory Dwelling Unit Loan Program or other local initiatives.

CalHFA ADU Grant Program (Paused)

The California Housing Finance Agency (CalHFA) launched the ADU Grant Program to make building an ADU more accessible for low- and moderate-income homeowners. The grant offered up to $40,000 to reimburse early project costs such as architectural plans, building permits, soil tests, impact fees, and utility assessments (All Home). These expenses are often required before lenders can approve construction financing, making the grant especially impactful for households working toward an affordable home or supporting multi-generational living.

According to program documentation, $100 million in state funds financed 2,500 ADUs across California, making it one of the state’s most successful housing initiatives. As summarized by All Home:

“With $100 million available in funds, this program financed 2,500 potential ADUs. ADU Grant funds can be used towards pre-development and non-reoccurring closing costs associated with the construction of the ADU, including site prep, architectural designs, permits, soil tests, impact fees, property surveys, energy reports, and interest rate buy-downs.” — All Home

Although the grant is paused due to exhausted funding, many advocates and local City Council leaders expect the state to allocate new resources in future cycles. Meanwhile, some regions offer their own programs—such as the Plus One ADU Program or local City Loan initiatives—that help bridge gaps until statewide funding resumes.

Before you budget, check state and city programs first—grants or low-rate loans can cover early costs like plans and permits, shrinking what you need to borrow.

What ADU Loan Programs Are Available in San Diego?

San Diego offers one of the most supportive local ADU financing programs in California, designed to help moderate-income homeowners build affordable rental units on their properties. The San Diego Housing Commission (SDHC) created a dedicated ADU Finance Program to make construction more attainable while supporting regional housing goals set by local municipalities and the California Department of Housing & Community Development.

San Diego Housing Commission (SDHC) ADU Finance Program

The SDHC ADU Finance Program provides some of the most favorable loan terms in the state for eligible homeowners. The program offers construction-to-permanent loans up to $250,000, with a 1% interest rate during construction and a 4% fixed-rate loan once the project converts to a long-term mortgage (SDHC). This structure creates predictable financing and supports homeowners throughout the entire ADU build process, including permit approvals and coordination with a licensed construction manager or contractor registered with the California Contractors State License Board.

To qualify, homeowners must live onsite in either the main home or the ADU after completion. The newly built ADU must also be rented at affordable rates for seven years, aligning with San Diego’s broader affordability and Maximum Allowable Rent standards. The program supports moderate-income households, defined as those earning up to 150% of the area median income (AMI), allowing more residents to participate in ADU development (SDHC).

This financing option is especially helpful for homeowners who lack the equity for HELOCs or cash-out refinancing but still want to take advantage of San Diego’s growing ADU market—whether they plan to create rental income, a home office, or additional housing for family members.

San Diego ADU Loan Comparison Table

Can You Use Expected Rental Income to Qualify for an ADU Loan?

Most lenders do not allow homeowners to use projected ADU rental income when qualifying for financing such as home equity loans, HELOCs, cash-out refinances, or most conventional mortgage products. Qualification is based primarily on the homeowner’s current income, credit profile, and available equity—not future rents the ADU may generate once it receives a Certificate of Occupancy. This makes it harder for some property owners to qualify, especially when they plan to use the ADU as an income-producing unit or as additional space connected to their primary residence.

Exceptions

• FHA Renovation Loans (203k) may allow lenders to count a portion of projected rental income, which can help increase the qualifying loan amount when the ADU is part of a permitted renovation.
• Some California credit unions and specialty lenders are piloting ADU-friendly underwriting programs that review rental income on a case-by-case basis. These remain limited and are not yet standard across the industry but are slowly expanding in more ADU-supportive jurisdictions such as Long Beach and certain local municipalities.

Expert Insight

Housing finance expert Laurie Goodman highlights how restrictive rental-income guidelines remain for ADU financing:

“I find the counting of income to be very, very restrictive in terms of what the GSEs are doing…” — Laurie Goodman, Urban Institute (Scotsman Guide)

This helps explain why many homeowners struggle to qualify for traditional loans—even though ADUs offer strong rental potential once built and are increasingly encouraged by local housing programs such as the Backyard Builders Program or regional Accessory Dwelling Unit Grant initiatives.

Even if your ADU will rent quickly, most lenders won’t count future rent—plan to qualify using current income and equity, then use rent to offset payments later.

What Are the Cheapest or Lowest-Interest ADU Loan Options?

If your goal is to minimize borrowing costs while building an ADU, several financing options stand out in California—especially for San Diego homeowners. The lowest-interest choices typically come from local government programs, renovation loans based on after-improved value, or equity-based financing for property owners who already have strong home equity. These options are often more accessible than traditional lending and resemble affordability-driven programs offered in cities like Long Beach or through regional Accessory Dwelling Unit Grant initiatives.

SDHC’s 1% Construction Loan (San Diego Only)

The San Diego Housing Commission (SDHC) ADU Finance Program offers one of the lowest-cost ADU financing options statewide. Eligible homeowners can secure a 1% interest rate during construction, which later converts to a 4% fixed mortgage—a structure similar to other city-supported programs such as the Pasadena ADU Loan Program. The SDHC program provides up to $250,000 and is available to owner-occupants earning up to 150% of the area median income (AMI) (SDHC).

This remains the cheapest ADU financing option in San Diego.

Renovation Loans Based on Future (After-Improved) Value

Loans such as FHA 203k or Fannie Mae Homestyle base the loan amount on your home’s post-construction appraised value, enabling higher borrowing limits even for homeowners with limited existing equity. Borrowing against the future completed value of the ADU can significantly reduce out-of-pocket costs and may offer more favorable terms than traditional construction loans. These programs can also support energy-efficient upgrades if included in the project scope.

HELOCs (If Your Home Has Strong Equity)

A Home Equity Line of Credit (HELOC) is another low-cost option—especially useful during phased construction when expenses arise at different times. HELOCs allow homeowners to draw only what they need, offering flexibility similar to a rolling Application Window found in local home-rehab programs. Rates vary, but borrowers with strong equity and credit typically secure the most favorable terms, making HELOCs one of the most commonly used ADU financing tools in California.

CalHFA ADU Grant (When Reopened)

Although currently paused, the CalHFA ADU Grant Program previously provided up to $40,000 per homeowner to cover pre-development costs such as architectural plans, permits, soil tests, and impact fees (All Home). With $100 million allocated, the program funded 2,500 ADUs across California, making it one of the most effective statewide efforts to support ADU development.

If renewed, this grant becomes the cheapest ADU financing option available—because it does not require repayment, functioning more like a Reservation of Fund granted to help homeowners advance early project stages.

Low-interest programs usually require affordability rules or owner-occupancy—check eligibility early so you don’t design a project you can’t finance.

How Do You Choose the Right ADU Loan for Your Situation?

Choosing the right ADU loan depends on your home equity, income level, and how quickly you need funding. California offers a mix of traditional lending products and specialized programs like San Diego’s SDHC ADU Finance Program, each designed for different homeowner profiles. Below is a simple decision framework to help you match your financial situation with the most suitable ADU financing option.

Based on Equity

If you have strong home equity, a HELOC or home equity loan is often the most cost-effective and simplest option. These products allow you to borrow against your existing equity and typically offer competitive rates, fixed or flexible terms, and quick approvals. Equity-based loans are widely used by California homeowners building ADUs, with many choosing HELOCs for their flexibility during staged construction.

If you have limited equity, a construction loan or renovation loan (such as FHA 203k or Fannie Mae Homestyle) may be a better fit because these products base loan amounts on the after-improved value of your home once the ADU is complete. This allows homeowners to borrow more than their current equity would normally allow.

Based on Income

For moderate-income homeowners, especially in San Diego, the San Diego Housing Commission (SDHC) ADU Finance Program is one of the best options. It offers 1% construction interest, a 4% permanent fixed rate, and up to $250,000 for those earning up to 150% of area median income (AMI) (SDHC).

For lower-income homeowners, local affordable housing programs and county-level initiatives may offer reduced-rate or forgivable loans tied to affordability requirements. These programs help ensure ADUs contribute to broader affordable housing goals across California.

Based on Speed

If you need funding quickly, HELOCs generally offer the fastest approval and access to funds, making them ideal for homeowners who already have plans and contractors lined up.

If you are not in a rush and prefer a structured, staged release of funds, a construction loan may be more appropriate. These loans require more documentation and inspections but provide controlled financing aligned with the build schedule.

Choose your loan based on what you’re short on: equity points you to HELOCs, low equity favors renovation/construction loans, and income limits may open SDHC-style programs.

Step-by-Step: How to Apply for an ADU Loan in California

Applying for an ADU loan in California involves a mix of project planning, financial preparation, and lender coordination. Because ADU financing varies by loan type—HELOC, construction loan, renovation loan, or local programs like San Diego’s SDHC—it’s important to follow a structured process to ensure the best approval chances and cost outcomes. Below is a simple, clear step-by-step guide any homeowner can follow.

1. Estimate Your ADU Project Cost

Begin by determining the likely cost of your ADU. Statewide research shows a median ADU construction cost of about $150,000 (Terner Center), with most projects falling between $100,000 and $300,000. In San Diego, homeowners often see $300–$450 per sq. ft., depending on design and site conditions. A realistic cost estimate will help you determine how much financing you need.

2. Get Preliminary Plans or Concept Designs

Lenders typically require at least conceptual plans to evaluate the project scope. Even renovation loans like FHA 203k and Fannie Mae Homestyle require documented plans because loan amounts depend on the after-improved value of your home once the ADU is built.

3. Obtain Multiple Contractor Bids

Collect detailed bids from licensed contractors to confirm the projected cost. Lenders often ask for formal bids—especially for construction and renovation loans—to validate your requested loan amount and construction timeline.

4. Check Your Home Equity and Credit Profile

Your financing options depend heavily on equity and credit strength:

• Strong equity → HELOC or home equity loan
• Limited equity → construction loan or renovation loan
• Moderate income (San Diego) → SDHC 1% ADU program (SDHC)

If your credit or equity is limited, consider renovation loans that use post-construction value or look into local affordability-based programs.

5. Compare Lenders and Loan Products

Research multiple lenders, including:

• Traditional banks
• Credit unions (some piloting ADU-friendly underwriting in CA)
• FHA and Fannie Mae renovation loan providers
• Local agencies like SDHC for qualified San Diego homeowners

Because most lenders do not count future ADU rental income for qualification, your actual borrowing capacity may vary significantly (Scotsman Guide).

6. Start the Loan Application

Once you choose a lender, you’ll submit:

• Income documentation
• Credit history
• Property information
• Contractor bids
• Project plans
• Budget and timeline

Construction loans may also require inspections and draw schedules before approval.

7. Receive Funds and Begin ADU Construction

After approval and final underwriting, funds will be released depending on the loan type:

• HELOC / Home Equity Loan: Lump sum or draw-as-needed
• Construction Loans: Staged draws as construction progresses
• SDHC Program: Construction-to-permanent structure with early low-interest support
• Renovation Loans: Funds tied to the after-improved valuation

Once construction begins, stay in communication with your lender to ensure inspections, draw releases, and project milestones stay on track.

Before applying, confirm your site feasibility and rough budget—lenders move faster when plans, bids, and a realistic cost range are already in hand.

What Are the Biggest Challenges in Financing an ADU?

Financing an ADU can be one of the most difficult parts of the building process, even in California where state laws have made ADU construction easier. The biggest obstacles relate to limited access to affordable financing, strict lending criteria, and high upfront costs that many traditional lenders will not finance without substantial homeowner equity. Research shows that because many homeowners struggle to qualify for loans, they end up relying heavily on personal savings or family assistance—creating financial strain before the ADU is even built.

A statewide survey highlighted that 62% of homeowners relied on personal cash or family gifts to finance their ADUs, underscoring how financing gaps remain a major barrier (Scotsman Guide). Similarly, renovation financing platform RenoFi reports that 87% of homeowners use cash, drain emergency savings, borrow from retirement accounts, or rely on family loans to fund renovation projects, including ADUs (RenoFi).

As RenoFi CEO Justin Goldman explains:

“87% of them use cash—borrowing from retirement accounts, draining emergency savings, or borrowing from friends and family.” – Justin Goldman, CEO of RenoFi

Strict underwriting practices are another challenge. Many lenders do not count future ADU rental income when qualifying homeowners for loans, limiting borrowing power even when the ADU will eventually generate $1,900–$2,300/mo in rent. This combination of high pre-development costs, unsupportive lending standards, and limited program availability makes financing one of the toughest hurdles for California homeowners pursuing ADU projects.

Plan for upfront pre-development costs (plans, permits, utilities) since these often hit before loan funds are fully available.

Do ADUs Increase Property Value?

Yes — ADUs generally increase property value in California. Multiple statewide studies and appraisal analyses show that homes with accessory dwelling units tend to sell for more and attract stronger buyer demand because they offer flexible living space and potential rental income. While exact value increases vary by location, lot size, and ADU type, adding a legally permitted ADU is widely viewed as one of the most value-enhancing upgrades a homeowner can make.

Once the ADU is complete, many homeowners can also pursue an after-completion refinance, which may offer better mortgage terms because the property now appraises higher. This is particularly beneficial for homeowners who used a construction or renovation loan, since these products are designed to convert into long-term financing based on the after-improved value of the home.

Beyond appraisal value, ADUs also improve long-term affordability. Rental income — averaging $1,900–$2,300 per month across California (RenoFi) — can help offset mortgage payments, property taxes, and ongoing homeownership costs. For many California homeowners, an ADU is both a lifestyle upgrade and a financially strategic investment.

Appraisers value ADUs most when they’re fully permitted, code-compliant, and rentable—those factors raise after-improved value and refinance options.

ADU Financing Resources for California & San Diego

Staying informed is easier when you have the right official resources. The following verified state and local links provide dependable information about ADU laws, financing programs, costs, and permitting. These sources come directly from California housing agencies, San Diego public programs, and leading ADU research institutions.

California Resources

CalHFA ADU Grant Program (Paused)

The California Housing Finance Agency (CalHFA) offered up to $40,000 for ADU pre-development costs, helping fund 2,500 projects statewide before program funds were exhausted.

Visit CalHFA’s official ADU page for updates and future announcements:
🔗 https://www.calhfa.ca.gov/
For a clear explanation of what the program covered—including soil tests, architectural plans, impact fees, and energy reports—see All Home’s summary:
🔗 https://www.allhomeca.org/solutions/adu-grant-program/

Terner Center for Housing Innovation (UC Berkeley) – Statewide ADU Research

The Terner Center provides some of the most credible ADU data available—including the widely cited median $150,000 California ADU cost. Their statewide ADU owner survey and policy reports are essential reading for homeowners planning a project.

ADU Owner Survey (Cost Data):
🔗 https://ternercenter.berkeley.edu/blog/cci-adu-survey/

San Diego Resources

San Diego Housing Commission (SDHC) – ADU Finance Program

The SDHC ADU Finance Program offers some of California’s lowest-cost ADU financing, including:

• 1% interest during construction
• 4% fixed mortgage after conversion
• Up to $250,000
• Income eligibility: ≤150% AMI
• 7-year affordability requirement

Learn more or apply here:
🔗 https://sdhc.org/housing-opportunities/adu/

City of San Diego – Official ADU Guide

This is San Diego’s main ADU resource hub, offering:

• Permitting requirements
• Zoning rules
• Design standards
• Fee info
• Bonus ADU program details

🔗 https://www.sandiego.gov/planning/work/housing/toolkit/accessory-dwelling-units

Conclusion: Which ADU Loan Program Is Best for You?

Choosing the best ADU loan in California depends on your equity, income level, and project scope. Homeowners with strong equity often benefit most from a HELOC or home equity loan, which offer competitive rates and flexible access to funds. Those with limited equity may qualify more easily for construction loans or renovation loans, which base borrowing amounts on the after-improved value of the home once the ADU is complete. For San Diego residents, the SDHC ADU Finance Program offers some of the lowest borrowing costs in the state, including 1% construction interest and up to $250,000 in financing. And if the CalHFA ADU Grant Program is refunded in the future, qualifying homeowners could again access up to $40,000 in pre-development assistance at no cost.

The best ADU loan depends on your equity, income, and project size.

• Strong equity → HELOC or home equity loan
• Low equity → Construction loan or renovation loan
• San Diego residents → SDHC 1% ADU loan
• When available → CalHFA $40K ADU Grant

Lock your financing path before construction begins—switching loan types mid-build can delay draws, inspections, and your final Certificate of Occupancy.