Cost and money

How to pay for an ADU

Checked against state laws and official agency sources · Last reviewed October 9, 2026

Cash-out refinance

A cash-out refinance replaces your mortgage with a bigger one, and you get the difference in cash. In Fannie Mae's rules, the new loan "must be used to pay off existing mortgage loans by obtaining a new first mortgage secured by the same property, or be a new mortgage on a property that does not have a mortgage lien against it."

Fannie Mae also requires that "at least one borrower must have been on title to the subject property for at least six months" before the new loan is paid out, with some exceptions. Maximum loan-to-value limits are in Fannie Mae's Eligibility Matrix.

Under FHA rules, rent from a planned or existing ADU can't help you qualify for a cash-out refinance. The FHA wording: "rental income from the ADU cannot be used as Effective Income to qualify for a cash-out refinance." [2][4]

Home equity loan or HELOC

Both borrow against the equity in your home and leave your first mortgage in place. The CFPB says that if you already have a mortgage, these loans "would be considered second mortgages that you'd need to pay in addition to your first mortgage."

• Home equity loan: "you receive the money you are borrowing in a lump sum payment, and you may have a fixed or adjustable interest rate."
• HELOC: "you can borrow or draw money multiple times from an available maximum amount." The CFPB notes HELOCs "usually have adjustable interest rates and the payment will vary depending on the outstanding balance."

The CFPB suggests talking to a housing counselor first if you are having trouble paying your mortgage. [1]

Renovation loans: HomeStyle, FHA 203(k) and CHOICERenovation

A renovation loan folds the building cost into one mortgage when you buy or refinance.

Fannie Mae HomeStyle Renovation. Fannie Mae says HomeStyle "may be used to construct various outdoor buildings and structures when allowed by local zoning regulations," and lists "accessory units" as an example. For a refinance, renovation costs must not exceed "75% of the 'as completed' appraised value of the property." On a purchase, the cap is 75% of the lesser of price plus renovation costs, or the as-completed value. A "Do It Yourself" option exists for one-unit homes, but "may not represent more than 10% of the 'as completed' value."

FHA 203(k). HUD offers two types. The Limited 203(k) lets homebuyers and homeowners "finance up to $75,000 into their mortgage" for "minor remodeling and non-structural repairs," among other uses. The Standard 203(k) is for "major rehabilitation and repair," with rehab costs of "at least $5,000." FHA's ADU rules (Mortgagee Letter 2023-17) list these Standard 203(k) uses:

• "converting a one-family Structure to a one-family Structure with an ADU"
• "adding an Accessory Dwelling Unit (ADU) that will be attached to an existing Structure"
• "renovating an existing ADU that is attached or unattached to an existing Structure"

Freddie Mac CHOICERenovation. Freddie Mac says buyers and refinancers "can use Freddie Mac's CHOICERenovation® mortgage, to add a new ADU." It also says the loan "is ideal to finance the renovation of an old barn, garage or shed into an ADU." Transactions are purchase or "no cash-out refinance."

Ask a lender that offers these loans which one fits your project. For a garage project, see garage conversions. [3][4][5][10][11][12]

Construction loans for ADUs

Some states now offer loans just for building an ADU.

Massachusetts: MassHousing ADU Loan Program. It offers "loans of up to $250,000 for detached ADUs, and up to $150,000 for attached ADUs." The loans combine "an amortizing, interest-bearing loan with additional zero-interest, deferred-repayment financing." Eligible homeowners must "own a single-family home, which they occupy as their primary residence" and meet income limits. You also need your plans and permits in hand, and "projects started prior to closing are not eligible." Loans are made through MassHousing lending partners. See our Massachusetts page.

Colorado: ADU finance programs. Colorado's Department of Local Affairs (DOLA) says homeowners "in ADU Supportive Jurisdictions seeking financing may be eligible for ADU Finance Programs offered through lenders." It names an "ADU Interest Rate Buydown Program" and an "ADU Credit Enhancement Program." Ask a lender, and see our Colorado page.

Renovation loans (above) can also pay for building work. [8][9]

Can ADU rent help you qualify for the loan?

Sometimes. The rules differ by loan type.

FHA. Lenders "may consider Rental Income from existing and prospective renters" when the home "is or will be a one-unit dwelling with an ADU." With no rental history, the lender "must use 75 percent of the lesser of" the appraiser's fair market rent or the lease rent. ADU rent "must not exceed 30 percent of the total monthly Effective Income used to qualify the Borrower." On a 203(k) loan with no rental history, the figure is "50 percent of the lesser of" those two amounts. If ADU rent is used, the lender must also document "two months' PITI" in reserves. HUD has since added these rules to its Single Family Housing Policy Handbook (Handbook 4000.1).

Fannie Mae. The Selling Guide (B3-3.8-02, dated 09/02/2026) allows ADU rent on "one-unit Accessory Dwelling Unit (ADU) allowed with a one-unit primary residence only." Limits:

• "Rental income is only allowed from one existing ADU."
• "Purchase or limited cash-out refinance transactions only."
• "The qualifying rental income amount from the ADU is limited to 30% of the total qualifying income."

On a purchase, the lender multiplies "monthly gross rent by 75%." Borrowers with less than 12 months of property management experience can use rent only "to offset the PITIA."

Freddie Mac. Freddie Mac says ADU rent "can even be used as qualifying income, if certain requirements are met," for a 1-unit primary residence. The rules are in its Guide, Chapter 5306.

Your lender applies the rule for the loan you choose. Run your numbers in the ADU calculator. [4][5][6][13]

Grants and state programs

California: CalHFA ADU Grant (no funds now). The grant paid "up to $40,000 to reimburse pre-development and non-recurring closing costs." CalHFA's latest notice, dated December 28, 2023, says "the latest round of ADU funding has been fully allocated." California's housing department also says "the funds have been exhausted." CalHFA warns: "If anyone approaches you saying they can help you get an ADU Grant, it is a financial scam." Check the CalHFA ADU page for any new round.

Colorado: ADU Grant Program. This grant goes to local governments, not homeowners. DOLA says "this program awards grants directly to local governments." Local and tribal governments certified as "ADU Supportive Jurisdictions" can use it for pre-approved plans, technical help and fee waivers. The third round is open to local governments from September 28 to October 23, 2026. Ask your city whether it takes part, and see the DOLA ADU Grant page.

Local help. HCD says "some local agencies are creating funding opportunities for ADU/JADU predevelopment and construction costs, or they are waiving fees." Check your city page, such as Los Angeles, San Diego or Portland. [7][9][14]

Questions people ask