How to Finance an ADU Project in California

What Is ADU Financing?

ADU financing is the process homeowners use to fund the design, permitting, and construction of an accessory dwelling unit—whether it’s a backyard cottage, granny flat, garage conversion, or other type of additional living space. These financing options may include home equity loans, fixed-rate loans, Home Equity Lines of Credit (HELOCs), construction loans, renovation loans, or creative alternatives such as shared-equity agreements and crowdfunding.

Together, these loan options help California and San Diego homeowners build ADUs that create long-term value, support multi-generational living, and generate income-producing rentals. Leading authorities such as the Terner Center for Housing Innovation, USC Lusk Center, San Diego Housing Commission (SDHC), CalHFA, the Casita Coalition, and federal housing leaders like Rep. Sam Liccardo all emphasize the importance of expanding accessible ADU financing to meet California’s housing needs.

Why ADU financing matters in California & San Diego

• 1 in 5 new homes in CA are ADUs (California YIMBY)
• San Diego ADU costs: $200,000–$450,000 (Better Place Design & Build)
• Homes with ADUs sell for ~35% more (Porch)
• San Diego ADU rents: $1,900–$3,600 (Better Place Design & Build)
• 19% of all new California homes in 2022 were ADUs (California YIMBY)

ADU financing includes the lending tools, equity programs, and local incentives homeowners use to cover construction costs for an accessory dwelling unit. Whether the project is a detached backyard unit, an internal ADU, or a garage conversion on a single-family home, financing can involve HELOCs, refinance loans, renovation loans, or local programs like SDHC’s affordable lending products. These funding paths help homeowners manage building plans, permits, and utility hookups while creating additional space for living, family members, or rental income.

ADU financing is easiest to secure when you have clear plans and a defined scope—start with a builder estimate before choosing a loan type.

What Does It Cost to Build an ADU in California?

Building an ADU in California typically costs between $150,000 and $350,000, with many projects starting around the $150,000 mark according to design research from Jean Prescott Studio. In San Diego—where labor, materials, and local building codes can increase overall project requirements—a full turnkey ADU generally ranges from $200,000–$450,000 or $375–$600 per sq. ft., based on pricing from Better Place Design & Build.

California’s construction costs have continued to rise as well, with the state’s Construction Cost Index increasing roughly 37% from 2021 to 2024, impacting everything from building permits to design and site work. These price ranges apply whether the ADU is a detached backyard unit, a converted garage, or an internal accessory apartment created within an existing single-family home.

Cost Breakdown

Typical ADU budgets include:

• Design & engineering
• City permits & fees
• Site work (grading, utilities, trenching)
• Construction & labor
• Interior finishes & fixtures

San Diego vs. Statewide Costs

San Diego ADU projects tend to fall on the higher end of California’s cost spectrum due to:

• Local labor rates
• Soil/geotechnical requirements
• Utility connection complexity
• Higher finish-level expectations

Where a $150k ADU may be feasible in parts of California, San Diego homeowners more commonly see costs in the $200k–$450k range.

Costs vary most with sitework and utility hookups, so include a contingency early—especially if your build needs trenching or panel upgrades.

What Are the Main Ways to Finance an ADU?

Financing an ADU can be achieved through several proven lending products, local government programs, and emerging private-market solutions. Many California homeowners use home equity tools—such as a Home Equity Line of Credit (HELOC) or home equity loan—while others choose construction or renovation loans that allow borrowing based on the future appraised value of the property. These options make it possible to build a detached backyard unit, garage conversion, or even an internal ADU for housing for family members or multi-generational living.

Local programs—such as the San Diego Housing Commission’s up to $250,000 construction-to-permanent loan—offer additional support, especially for households with limited equity or lower Household Income. For homeowners who need alternatives to traditional lending, shared-equity agreements, crowdfunding, and private lenders can provide flexible funding paths that align with different lender policies and zoning requirements. Below is an overview of the main ADU financing options available today, supported by verified research sources.

Pick financing based on your timeline: HELOCs work well for phased builds, while construction-to-perm loans fit full ground-up projects.

1. Home Equity Loans & HELOCs

Home equity loans and Home Equity Lines of Credit remain the most common ADU financing method, largely because they offer lower rates and flexible access to funds for projects like a backyard cottage or basement apartment conversion. These products typically allow borrowing up to 80–90% LTV, depending on the lender and credit profile. A HELOC can be especially useful during the design process or building permit application stage, since interest-only payments during the draw period make it easier to manage staged construction costs.

2. Cash-Out Refinance

A cash-out refinance replaces the homeowner’s existing mortgage with a new, larger one and provides a lump sum to help build an ADU, whether it’s a garage conversion or a small law suite for housing family members. This option works best when current market rates are similar to or lower than the homeowner’s existing fixed-rate mortgage. It’s less ideal for those wishing to preserve a low-rate first mortgage, especially in high-cost regions regulated by zoning laws and local municipalities.

3. Construction Loans

Construction loans are designed for homeowners who do not have enough equity for ADU financing through traditional tools like home equity loans. These loans release funds in phases as construction progresses and later convert into a permanent mortgage—helpful for larger projects like a 2–4 unit dwelling or expanded accessory apartment. Industry guidance indicates that many lenders prefer credit scores around 680+, though lender policies and additional requirements vary across local municipalities.

4. Renovation Loans (FHA 203k & Fannie Mae HomeStyle)

Renovation loans allow homeowners to finance ADU construction based on the future appraised value of the home, which is beneficial for low-equity households upgrading a property for multi-generational living or mobility assistance needs. According to the Terner Center for Housing Innovation, only 6.3% of ADU owners used renovation loans—despite being “well-suited for homeowners without significant equity, but underused” (Terner Center). These products can also support energy-efficient upgrades and independent bathrooms required for an internal ADU.

5. Government Programs (SDHC, CalHFA)

Local programs such as the San Diego Housing Commission (SDHC) ADU Finance Program provide up to $250,000 in construction-to-permanent financing with free technical support (SDHC), making them valuable for owners navigating building codes or zoning regulations. At the state level, the CalHFA ADU Grant Program previously offered $40,000 toward pre-development costs, though funding is now exhausted due to high demand influenced by California’s affordable housing shortage.

6. Shared Equity Agreements

Shared equity financing provides 5–30% of the home’s value upfront with no monthly payments, which can be helpful for income-stable homeowners who lack liquidity but want to create additional living space for family members. In exchange, the homeowner gives up 25–40% of future appreciation. As noted by Noerena Limón of the Casita Coalition, second-position financing structures “make it possible for more families to build the ADUs they need” (Scotsman Guide). These agreements are often considered when traditional loan options or personal loans are not suitable.

7. Crowdfunding & Private Lending

Crowdfunding platforms allow homeowners to raise $50,000–$100,000 from small investors seeking 8–12% returns—an option sometimes used when designing an ADU as a home office, rental unit, or accessory apartment. Private money and hard money lenders also provide fast-approval ADU loans ranging from $50,000–$500,000, typically with 8–15% interest. These are helpful for homeowners needing flexibility beyond what standard purchase loans or credit-based products can provide, especially when navigating building permit applications or unique zoning regulations.

Summary Table of ADU Financing Options

Can I Use Home Equity to Finance an ADU? (HELOC / Home Equity Loan)

Yes — using home equity is the most common way homeowners finance an ADU. HELOCs (home equity lines of credit) and home equity loans allow borrowers to tap into the existing value of their home to cover ADU design, permitting, and construction costs, often with simpler approval and lower interest rates than other loan types.

Key Details

• Homeowners can generally borrow up to 80–90% loan-to-value (LTV), depending on the lender.
• Example: A home valued at $700,000 with a remaining mortgage of $400,000 may offer roughly $160,000 in accessible equity under typical LTV guidelines.
• Home equity financing remains the most commonly used pathway among California ADU builders, as confirmed in statewide research by organizations such as the Terner Center for Housing Innovation, which found that equity-based tools (cash-out refis, HELOCs, and home equity loans combined) make up the majority of ADU funding.

Pros of Using Home Equity for an ADU

• Lower interest rates compared to construction or private lending
• Simpler approval process, especially for HELOCs
• Flexible draw schedules that match construction timelines
• No need to replace your first mortgage (unlike cash-out refinance)

Cons of Home Equity ADU Financing

• HELOCs often have variable rates, which can increase payment uncertainty
• Adds a second lien to the property, which some lenders treat as higher risk
• Requires sufficient existing equity, limiting access for homeowners with newer or highly leveraged mortgages

Before applying for a HELOC, confirm your loan-to-value ratio—strong equity positioning can secure better rates and approval terms.

How Does a Cash-Out Refinance Work for an ADU?

A cash-out refinance replaces your existing mortgage with a new, larger one and allows you to use the difference in cash to fund your ADU—whether it’s a small backyard unit, an internal suite with bathrooms independent, or a garage conversion designed for multi-generational living or mobility assistance needs. Instead of adding a second loan like a HELOC or relying on personal loans or credit cards, you take out a new first mortgage based on your home’s current value and use the lump sum to cover design plans, building permits, and construction. Most lenders allow borrowing up to around 80% loan-to-value, paying off your old mortgage at closing and releasing the remaining funds to you.

This approach works best when the new interest rate is close to or lower than your current mortgage rate, especially if you need a predictable, long-term budget rather than flexible construction financing. Many ADU-focused lenders view cash-out refinancing as a strong option for homeowners who want one fixed monthly payment on a 1-unit property or even a future 2–4 unit dwelling after the ADU is complete. However, it’s not ideal if you currently hold a very low-rate mortgage, because refinancing would replace that favorable rate with today’s higher one—a challenge noted by researchers at the Terner Center for Housing Innovation and ADU advocates such as the Casita Coalition, who highlight how high rates can delay ADU projects for many California homeowners.

Use cash-out refinancing when you need a predictable, single monthly payment—ideal for homeowners planning full turnkey ADU builds.

What Is a Construction Loan for ADUs and Who Should Use It?

A construction loan is a short-term financing option designed to fund the step-by-step building of your ADU, releasing money in draws as each phase of construction is completed. Unlike a home equity loan or HELOC, a construction loan does not require significant existing equity, making it a strong option for homeowners who have limited equity but solid income and credit. Many lenders that offer ADU-friendly construction loans convert the loan into a permanent mortgage once the ADU is finished, eliminating the need for a second closing.

Construction loans are most appropriate when a homeowner needs a larger upfront budget than their equity allows and wants funding tied directly to verified construction progress. Industry guidance from construction-focused lenders—such as ADU specialists like SnapADU and renovation lenders like RenoFi—shows that these loans are commonly used by households building larger or ground-up detached ADUs. Research and financing analysis from the Terner Center for Housing Innovation further notes that construction-style financing is essential for homeowners who lack the equity needed for traditional home-equity products.

Construction loans release funds in stages, so your contractor schedule matters—tight draw management can prevent delays and extra interest.

Can I Use a Renovation Loan (FHA 203k or HomeStyle) to Build an ADU?

Yes — renovation loans such as the FHA 203k and Fannie Mae HomeStyle can be used to build an ADU, and they are unique because they base your loan amount on the future appraised value of your property after the ADU is completed. This makes them especially helpful for homeowners who want to build an ADU but don’t have much existing equity.

Key Stats & Quotes (Verified Sources Only)

• Only 6.3% of ADU owners used renovation loans, according to the Terner Center for Housing Innovation’s statewide analysis of ADU financing behavior (Terner Center).
• The Terner Center further notes that “renovation loans are theoretically well-suited for homeowners without significant equity, but remain relatively unused.” (Terner Center).

How Renovation Loans Work for ADUs

• Fannie Mae HomeStyle:

This loan allows financing for detached ADU construction, making it one of the few conventional loan products that explicitly supports standalone ADUs. It also uses the home’s after-renovation value, enabling larger loan amounts for low-equity homeowners.

• FHA 203k:

While traditionally used for rehabilitation work, the 203k can also finance additions, including ADUs in certain cases. Like HomeStyle, it relies on future appraised value, increasing borrowing power.

Why Renovation Loans Help Low-Equity Homeowners

Because both FHA 203k and HomeStyle loans allow higher loan-to-value (LTV) ratios—often exceeding the limits of standard HELOCs or home-equity loans—they offer a path for homeowners who lack enough equity to tap traditional financing. This is precisely why researchers at the Terner Center highlight them as “well-suited” for equity-poor households.

What to Expect: Requirements & Process

• Detailed contractor bids and scope of work
• Inspections during construction to release funds
• Additional paperwork and lender oversight compared to HELOCs or cash-out refinances

Despite the added steps, renovation loans remain one of the most powerful but underutilized financing tools for California ADU projects.

Renovation loans rely on future appraised value—choose higher-quality finishes strategically to support a stronger after-renovation valuation.

Are There Government Programs, Grants, or Local Incentives for ADU Financing?

California homeowners—especially in cities like San Diego and Los Angeles—have access to several government-backed programs designed to make ADU construction more affordable. While some statewide grants have expired due to high demand, new federal proposals and strong local incentives continue to expand financing opportunities. Below is a breakdown of the most relevant programs, using only verified sources.

California (State-Level Programs)

CalHFA ADU Grant — $40,000 (Program Exhausted)

The California Housing Finance Agency previously offered a $40,000 ADU Grant to help homeowners cover predevelopment and non-recurring closing costs. This program became one of the most sought-after ADU incentives in the state and is now fully exhausted due to overwhelming demand.

More information: https://www.calhfa.ca.gov/

Federal Level (Future Policy)

SUPPLY Act — Proposed HUD-Backed Second Mortgages for ADUs

In 2025, Rep. Sam Liccardo and Rep. Andrew Garbarino introduced the bipartisan SUPPLY Act, a bill that would allow HUD to offer government-backed second-position mortgages specifically for ADU construction.

Liccardo explained that the bill “will help homeowners of modest means overcome what is often the last hurdle to breaking ground on an ADU.” (U.S. House Press Release)

This federal proposal is not yet active but reflects growing national interest in ADU development.

San Diego (Local Incentives)

San Diego Housing Commission (SDHC) — Up to $250,000 ADU Loan Program

The SDHC ADU Finance Program offers qualifying San Diego homeowners up to $250,000 in construction-to-permanent financing to help build new ADUs, along with free technical assistance throughout the process.

The program also includes a 7-year affordability covenant, requiring the ADU to be rented at affordable rates during that period. (SDHC ADU Program)

This is one of the strongest ADU support programs available anywhere in California.

Los Angeles (Regional Example)

LA County ADU Pilot — Up to $75,000 Forgivable Loans

As a regional example, Los Angeles County launched an ADU pilot program that offered up to $75,000 in forgivable loans to participating homeowners in unincorporated LA County.

According to LA Más, the nonprofit partner supporting the pilot, homeowners received forgivable funds in exchange for renting the ADU to tenants transitioning out of homelessness for a minimum of 10 years. (LA Más)

Leverage local incentives early—programs like SDHC’s ADU financing can dramatically reduce out-of-pocket costs when planned before design and permitting.

What Are Creative ADU Financing Options? (Equity Share, Crowdfunding, Private Loans)

Beyond traditional home equity and loan products, many California homeowners are turning to non-traditional and creative financing models to build ADUs—especially those who lack substantial equity or want to avoid refinancing their first mortgage. These options include shared equity agreements, crowdfunding models, and private or hard money loans, each offering flexible pathways with different trade-offs.

1. Shared Equity Agreements

Shared equity agreements provide homeowners with 5–30% of their home value upfront in exchange for 25–40% of future appreciation. These arrangements require no monthly payments, making them a powerful tool for equity-poor but income-stable homeowners who want to build an ADU without taking on new debt. Companies and mission-driven housing organizations offer these agreements as an alternative to refinancing or HELOCs.

A leading voice in the ADU financing space, Noerena Limón, CEO of the Casita Coalition, emphasizes the importance of innovative financing structures that don’t force homeowners to sacrifice low-rate mortgages. Speaking about second-position financing models, she stated that they “make it possible for more families to build the ADUs they need.” (Scotsman Guide)

Shared equity is especially relevant for homeowners whose properties have appreciated significantly but who don’t have enough liquidity or cash to fund an ADU upfront.

2. Crowdfunding Platforms

Crowdfunding platforms provide a way for homeowners to raise $50,000–$100,000 from a pool of small investors who collectively fund ADU construction. These investors typically expect 8–12% returns, making crowdfunding a middle-ground option between traditional lending and shared equity. While homeowners must be prepared to provide project documentation and financial projections, crowdfunding offers a flexible pathway for owners who may not qualify for bank financing or who want to diversify their funding sources.

3. Private Money / Hard Money Lending

Private money and hard money lenders offer fast-approval financing for ADUs, typically issuing loans between $50,000 and $500,000. These loans come with interest rates in the 8–15% range, reflecting their speed and flexibility. Hard money financing can be useful for homeowners who need to move quickly, have non-traditional income profiles, or need a short-term solution before converting into long-term financing.

While more expensive than traditional loans, private lenders play a crucial role in helping homeowners jump-start ADU construction when timing or qualification barriers exist.

Will Building an ADU Pay for Itself? (ROI & Rental Income)

Often yes — many ADUs in California can cover a significant portion or even all of their financing costs through rental income. In strong rental markets like San Diego, monthly rents frequently offset loan payments, while long-term appreciation and increased property value add to the overall return on investment.

Key Stats

• Homes with ADUs sell for ~35% more, according to a national study by Porch analyzing ADU-related home sales across major U.S. cities. (Porch ADU Market Study)
• San Diego ADU rents range from $1,900–$3,600, based on local rental data and cost analysis from Better Place Design & Build. (Better Place Design & Build)
• Encinitas case study — Verified Build Cost: A documented project by SnapADU shows a 1,200 sq. ft. ADU built for approximately $385,000 in Encinitas. (SnapADU Project Example)

How an ADU Pays for Itself

1. Cash Flow Scenarios

With San Diego rents ranging from $1,900–$3,600, a well-financed ADU can often cover a large portion of its monthly loan payment—even under conservative financing assumptions. Higher-end units or multi-bedroom ADUs may exceed payment obligations, generating positive monthly cash flow.

2. Using Rent for Loan Qualification

Some lenders, including those offering Fannie Mae–aligned products, allow a portion of projected ADU rental income to count toward loan qualification. This can help homeowners qualify for larger renovation or construction loans, especially when the ADU’s projected rent meaningfully offsets monthly obligations.

3. ADUs as a Retirement or Long-Term Income Strategy

Many California homeowners build ADUs to create a semi-passive income stream, support multigenerational living, or improve resale value. With research showing ADU properties selling for a ~35% premium, ADUs offer both immediate rental income and long-term value growth—making them a strong financial tool for retirement planning and long-term wealth building.

Do I Qualify for an ADU Loan? (Credit, Income, Equity Requirements)

Qualification for an ADU loan depends on the type of financing you choose—each loan product has its own requirements for credit score, income, equity, and documentation. In general, lenders look at your credit profile, the equity in your home, your debt-to-income (DTI) ratio, and in some cases, the projected rental income from the ADU.

Key Stats

• Construction and HELOC lenders commonly look for credit scores around 680+, based on industry guidance from construction-loan and home-equity lending resources.
  (Example lender guidance: construction loans usually require scores “680 and above.”)
• Some ADU-related financing programs and lenders may set higher expectations—sometimes around 720—particularly when offering larger loan amounts or when equity is limited.
  (Note: This is based on lender practices, not a published state or federal guideline.)
• Fannie Mae allows lenders to use up to 75% of projected ADU rental income for qualification under certain rental-income policies, as outlined by mortgage lenders interpreting updated federal guidance.
  Source: Intercap Lending

What Lenders Typically Look For

1. Equity Requirements (10–20% Typical)

Most equity-based loans—such as HELOCs and home equity loans—require that homeowners retain 10–20% equity in their property after borrowing. This determines how much you can pull from your home to finance the ADU.

2. Debt-to-Income Ratio (DTI)

Lenders review your monthly debt obligations to ensure your income can support the new loan. Lower DTIs help secure better rates and faster approvals.

3. Documentation Needed

While requirements vary by lender, you should expect to provide:

• Proof of income (W-2s, tax returns, pay stubs)
• Credit report
• Current mortgage statements
• Preliminary ADU plans or estimated project costs
• Contractor bids or construction budgets (for renovation/construction loans)

Local ADU Financing Options for San Diego Homeowners

San Diego offers a robust ecosystem of local programs and incentives designed to make building an ADU more accessible and cost-effective. Below are key local tools, incentives, and regulatory considerations that homeowners in San Diego should know.

SDHC ADU Finance Program

The San Diego Housing Commission (SDHC) offers a dedicated ADU Finance Program for homeowner-occupied single-family residences within the City of San Diego (Zip codes beginning 921XX).

Key features:

• Loans up to $250,000 (construction-to-permanent) to eligible homeowners. (SDHC)
• Interest rate: 1% during construction phase; 4% fixed for permanent mortgage. (SDHC)
• Technical assistance at no additional cost (ADU consultant, project management, vendor support). (SDHC)
• Eligibility requirements: Income up to ~150% of AMI, minimum credit score of 680, the homeowner must occupy the main residence, and property must be in City of San Diego. (adu.sdhc.org)
• Affordability restriction: If funded by this program, the ADU must be rented to tenants ≤80% AMI for a minimum of 7 years. (SDHC)

Fee Waivers & Permit Incentives

• The City of San Diego previously offered fee waivers for ADU permits and impact fees, though the primary waiver program has phased out. (Better Place Design & Build)
• Some smaller municipalities in San Diego County (e.g., Encinitas, Vista, La Mesa) continue to offer fee waivers or incentives for smaller ADU units (<750 sq ft). (Better Place Design & Build)

ADU Bonus / Affordability Incentives

San Diego’s “Affordable ADU Bonus Program” enables additional ADUs beyond baseline state entitlement if one or more units are deed-restricted as affordable.

Highlights:

• For each deed-restricted affordable ADU, homeowners may build an additional unrestricted ADU (market-rent) in many cases.
• Properties within Transit Priority Areas (TPA) or Sustainable Development Areas (SDA) may have fewer limits on unit count.
• The bonus program also includes income/rent limits for the affordable unit, and the deed restriction period is 10 years (low income) or 15 years (moderate income) for affordability units.

Neighborhood-Level Cost & Rent Variations

• ADU cost estimates vary across San Diego neighborhoods due to lot size, utility access, geotech conditions, and local labor rates. The SDHC pilot and independent cost surveys reflect this variation.
• Rental income potential also varies: high-demand areas close to transit or walkable neighborhoods often command the upper end of the rental range ($1,900-$3,600) referenced elsewhere in your blog.

Property Tax Implications (Proposition 13 & ADUs)

• Under California Proposition 13, adding an ADU typically does not trigger a full reassessment to market value of the “parent” home—only the added value of the ADU is assessed in many cases.
• It’s still important to consult the County Assessor’s Office for your parcel, as qualifying conditions and local implementation can differ.
• The SDHC program and many local ADU incentives assume the homeowner retains the primary residence—making Prop 13 protections and property tax planning an important part of financing decisions.

If you’re using SDHC financing, plan for affordability terms early—your projected rent and lease strategy must align with program rules.

Step-by-Step: How to Choose the Best ADU Financing Option

1. Determine your ADU cost range

Start by estimating a realistic budget for your ADU based on California and San Diego benchmarks. Statewide, many projects begin around $150,000 (Jean Prescott Studio), while in San Diego, full turnkey builds often fall between $200,000–$450,000 or about $375–$600/sq ft. Use these ranges plus your designer/builder’s estimate to set a working budget.

2. Check your home equity and credit profile

Next, review your home’s value, current mortgage balance, and credit score. This will help you see whether you’re a good fit for equity-based products (HELOC, home equity loan, or cash-out refi) or whether you should focus more on construction or renovation loans that use future appraised value (Terner Center ADU financing report).

3. Compare major financing paths

Lay out your main options side by side:

• Home equity loans/HELOCs (best if you have strong equity and want flexibility)
• Cash-out refinance (good for large budgets if today’s rate is acceptable)
• Construction or renovation loans like FHA 203k or Fannie Mae HomeStyle (based on future value, useful for low-equity homeowners) (Terner Center)
• Government programs such as the SDHC ADU Finance Program with up to $250,000 in construction-to-perm funding (SDHC)
• Creative options like shared equity, crowdfunding, and private lending (Scotsman Guide – Casita Coalition quote)

Use a simple comparison table (rate, term, required equity, complexity) to see which path fits your situation.

4. Estimate rental income potential

If you plan to rent your ADU, plug in realistic rent numbers based on local data. In San Diego, typical ADU rents range from about $1,900/month for a studio to $3,600/month for a larger unit. Use those ranges plus local comps to estimate a conservative monthly rent for your planned unit.

5. Compare projected loan payments vs. rent

Now look at whether your projected rent can cover or exceed the estimated loan payment. Many lenders and calculators will show you monthly payments based on your loan amount and rate; you can then compare that to your estimated ADU rent. Research shows that homes with ADUs can also sell for ~35% more on average (Porch), so include equity gains and eventual resale value in your long-term ROI thinking—not just monthly cash flow.

6. Apply for your chosen financing option

Once you’ve chosen the most suitable path, gather documents and apply:

• Income verification (W-2s, tax returns, pay stubs)
• Current mortgage statements
• Preliminary ADU plans and contractor estimates
• Any program-specific forms (for example, SDHC ADU Finance Program applications via adu.sdhc.org)

If you’re pursuing a renovation loan, expect more documentation and lender oversight, which the Terner Center notes is one reason these otherwise “well-suited” loans remain underused (Terner Center).

7. Begin permitting and construction

After financing approval and closing, you can move into final design, permitting, and construction. In San Diego, check for local incentives such as the SDHC loan program (SDHC) or the Affordable ADU Bonus Program for extra units tied to affordability covenants. Keep your lender updated on milestones so draws (for construction loans/renovation loans) are released smoothly and on schedule.

Conclusion: Why Financing an ADU Is Worth It

Financing an ADU is one of the most financially impactful decisions a California homeowner can make. ADUs consistently add long-term value, with research showing that homes with ADUs sell for ~35% more on average. In strong rental markets like San Diego, monthly ADU rents—typically $1,900–$3,600—can offset or even exceed financing payments, helping homeowners build wealth while covering construction costs. ADUs also increase home equity as the new unit is added to the property’s assessed value, creating additional financial security over time.

Local incentives such as the SDHC ADU Finance Program, offering up to $250,000 in construction-to-permanent loans with free technical support, make financing more accessible for many San Diego residents. Beyond financial returns, ADUs provide long-term flexibility—supporting multigenerational living, creating passive income for retirement, or offering housing for extended family. For homeowners looking to build wealth, improve housing options, or increase property independence, financing an ADU is a powerful and future-proof investment.

ADUs thrive in competitive housing markets—strategic financing now can create strong equity gains as demand continues rising.