How to Finance an ADU in San Diego

Quick takeaways

• Best-fit Accessory Dwelling Unit (ADU) loan options: keep your low-rate first on your primary residence and borrow equity (HELOC/home-equity) or refi into construction/renovation financing so underwriting uses your after-improvement appraised value. (NerdWallet)
• SDHC ADU Finance Program (City of SD): up to $250,000, 1% during construction, then 4% fixed/15-yr permanent loan; 7-year affordability covenant—helpful when interest rate market conditions are high. (San Diego Housing Commission)
• CalHFA $40k ADU Grant Program: fully allocated as of Dec 28, 2023—monitor for future rounds as part of your ADU financing plan. (CalHFA)
• Fees: Impact fees waived under 750 sq ft statewide; school fees may apply >500 sq ft (district-set)—confirm alongside building permits. (HCD ADU Handbook 2025)
• Costs: Typical San Diego construction costs $375–$600+/sq ft depending on scope/site (mid-level projects often $375–$450/sq ft). (Platform/Ikkonic – San Diego)

San Diego–Specific Programs & Grants

SDHC ADU Finance Program (City of San Diego)

What it is: Construction-to-permanent construction financing plus free technical assistance for moderate-income, owner-occupant homeowners in the City of San Diego—ideal when adding an in-law suite/guest house for multi-generational living. (SDHC)

Key terms: Up to $250,000; 1% fixed during construction; converts to a 4% fixed, 15-year permanent loan (due in 30); up to 75% LTV; 7-year affordability covenant (≤80% AMI rents; no renting to family during the covenant). (SDHC)

Eligibility: Income up to $236,600 (150% AMI); owner-occupied detached SFR within city limits; 680+ Credit Score (FICO); $2,500 application fee at construction-loan closing. (SDHC)

Tip: If you qualify, SDHC’s below-market loan products can reduce carrying costs; some owners pair SDHC with a small Home Equity line of credit (HELOC) for overages.

CalHFA $40,000 ADU Grant (statewide)

Status: Fully allocated as of December 28, 2023 under the CalHFA ADU Grant Program; it previously reimbursed up to $40,000 for pre-development and certain closing costs. Monitor CalHFA bulletins for any future appropriations. (CalHFA)

ADU Bonus (Density) Program – City of San Diego

What it is: A local density bonus allowing additional ADUs when units are deed-restricted affordable for 15 years; rules vary inside Transit Priority Areas (TPAs) versus outside and must align with zoning regulations and local municipalities’ review. (City of San Diego)

2025 update: The Mayor’s office advanced reforms on scale/compatibility, parking outside TPAs, fire safety, penalties for covenant violations, and AB 1033 condo-sale implementation; final provisions await City Council action. (City memo)

Pre-qualify before design fees: confirm owner-occupancy, 150% AMI and ~680+ FICO, then lock the 1% construction phase—pair with a small HELOC to cover overages.

Core Financing Options

HELOC (Home Equity Line of Credit)

What it is: A HELOC is a revolving Home Equity line of credit secured by your main house—use it as needed during the design process and pay interest only on the amount you draw; you keep your existing first mortgage intact (often an adjustable rate per lender policies). (CFPB overview)

Best for: Preserving a low-rate first mortgage while flexibly funding an ADU, accessory apartment, or back yard cottage. (NerdWallet on ADU financing paths)

Watch-outs: Typically variable rates; verify margin, caps, and repayment features (including any interest-only loan period) with your lender. (CFPB)

Preserve a great first-lien rate with a HELOC; stage draws with your build schedule and ask about fixed-rate conversion options to cap exposure if rates rise.

Home-Equity Loan (Fixed-Rate Second)

What it is: A home-equity loan is a lump-sum, fixed-rate second with predictable payments; it doesn’t replace your first mortgage. (Investopedia explainer)

Best for: Homeowners who want payment certainty and to keep their current first lien while adding an ADU for multi-generational living or a home office.

Watch-outs: Size is limited by appraisal and lender CLTV rules; rates are often higher than first-lien mortgages. (Investopedia)

Great for predictable cash flow—keeps your low first intact. Sizing is CLTV-limited, so verify appraisal early and match payment to your ADU construction timeline.

Cash-Out Refinance

What it is: A cash-out refi replaces your existing mortgage with a larger first-lien and gives you the difference in cash for the ADU—one loan/one payment under current market conditions. (NerdWallet ADU financing guide)

Best for: Owners already planning to refinance loans or needing a large lump sum for utility connections and finishes.

Watch-outs: Potentially higher rate than your current loan; factor in closing costs and break-even math. (NerdWallet)

Run a break-even: higher rate and closing costs must be offset by ADU rent. If your first-lien rate is low, compare equity seconds before refinancing.

Construction Loan (Construction-to-Permanent)

What it is: A construction-to-permanent loan funds your build in milestone draws and underwrites on the home’s after-improvement value; after completion, it converts to a permanent mortgage (often replacing your first). (NerdWallet)

Best for: Low-equity owners or larger scopes that exceed equity limits, including Conversion ADUs and detached living quarters.

Watch-outs: More documentation, inspections, and closing steps; plan draw schedules, contingency, and coordination with your building team/project manager.

Low equity? Use construction-to-perm under after-improvement value. Have stamped plans, budget, and a GC contract ready to speed underwriting and draw approvals.

Renovation Loans (FHA 203(k) / Fannie Mae HomeStyle®)

What it is: Renovation mortgages bundle a purchase or refi with renovation funds and qualify on future value; common programs are FHA 203(k) and Fannie Mae HomeStyle® Renovation. (NerdWallet, HUD 203(k) overview, Fannie Mae HomeStyle)

Best for: Buying a single-family home with plans to add an ADU or adding an ADU when equity is limited.

Watch-outs: Program rules (approved contractors, MI/fees), paperwork, and timeline management through city plan check and inspections.

Ideal for purchase-plus-ADU or limited equity: qualifies on future value. Expect stricter contractor oversight, contingency reserves, and inspection-based disbursements.

HECM (Reverse Mortgage, 62+)

What it is: A HECM lets homeowners 62+ tap equity with no monthly mortgage payment; the loan becomes due when the home is sold, the borrower moves out, or passes away. (HUD HECM basics)

Best for: Seniors funding an ADU for caregiving, downsizing on-site, or creating an income-producing rental next to the main house.

Watch-outs: Interest/fees accrue and reduce remaining equity; independent counseling is required before proceeding. (HUD)

A HECM can fund an ADU with no monthly mortgage payment—plan for accruing interest, loop in heirs, and prioritize designs that generate stable rental income.

Costs, Fees & What To Budget (San Diego)

• Build cost planning: For budgeting, plan on $375–$600+ per sq ft for a turnkey detached ADU; scope, site work, utility connections (e.g., sewer line/electrical), and finishes drive the range—plus market factors like supply chains and energy-efficient upgrades (e.g., solar PV). See the San Diego market snapshot here. (Platform guide)
• Impact fees: Waived for ADUs under 750 sq ft statewide; for larger ADUs, fees must be proportional to the primary home and are assessed during permitting under local building codes. (CalHCD ADU Handbook, 2025)
• School fees: School districts may levy fees when an ADU is over 500 sq ft; confirm your district’s current schedule prior to City plan check or permit issuance. (CalHCD ADU Handbook, 2025)

Caution: “A lot of times people… think their ADU will cost $100k and it’s $300k. That’s going to stop the loan process in its tracks.” — James Carmody, ADU loan specialist (Maxable)

Compare Your ADU Financing Options (quick table)

How to Choose

• Decide whether to keep your first mortgage. If it’s a low rate, favor Home Equity lines of credit (HELOC) or a home-equity loan so you preserve it—“the advantage is you keep your low-rate primary mortgage.” — Will Johnson via NerdWallet
• Size your budget vs. equity. If lender CLTV limits won’t cover your scope, consider construction or renovation loans that underwrite on after-improvement (future) value and fund in draws—e.g., refi-plus-renovation paths outlined by NerdWallet.
• Leverage local incentives. If eligible, the San Diego Housing Commission (SDHC) ADU Finance Program can materially lower borrowing costs in exchange for a 7-year affordability covenant—useful whether your ADU is a conversion or detached unit. (SDHC)

Pro Tips

• “The main advantage to borrowing equity is that you keep your low-rate primary mortgage.” – Will Johnson (San Diego broker), noting “the advantage is you keep your low-rate primary mortgage.” (NerdWallet)
• “A lot of times people… think their ADU will cost 100 grand and it’s 300 grand. That’s going to stop the loan process in its tracks.” – James Carmody (Synergy One Lending), warning that underestimating costs can derail financing. (Maxable interview)

Start Your ADU Project with Better Place Design & Build

Get a free site assessment and financing roadmap – we’ll align scope, timelines, and a funding path you can qualify for, comparing Home Equity lines of credit vs. refinance vs. SDHC before you pay design fees. In one consult, we’ll compare equity and refi options (including construction financing that uses after-improvement value and HomeStyle® Renovation/FHA 203(k)), confirm eligibility for the SDHC program, and review fees and permitting basics to keep the budget realistic. To get started, call 858-355-9766 or visit our Contact Us page.

Pro tip: book the consult before paying design fees—align scope with the right financing path (HELOC vs refi vs SDHC) and confirm fees/permits to keep your ADU budget realistic.