adu financing options

ADU Financing Options

ADU financing options in California are complicated. There are lots of loan products and it is hard to know which loan product (or combination of products!!) is the right choice.

The Problem With ADU Financing

If your current mortgage is at a very low interest rate you won’t want to lose it. You might even assume that an ADU is off the table because of it.

But the current high-interest rates are a distraction taking away from the home life you dream about. In reality, there are a lot of ADU financing options that leave your current interest rate in place. There is even a California ADU Grant available that helps offset your costs to build. More on that topic is below.

Everything You Need To Know About Your ADU Financing Options

I interviewed Meredith Stowers with Cross Country Mortgage. She is an expert at California ADU financing and the lender of choice for most ADU companies in California. We applied her loan options for ADU financing to four common scenarios to help us understand some of the best ways to finance our Backyard Homes!

Five Reasons To Move Forward With Your ADU

Your ADU Financing options changed when the rates went up, but adding a Backyard home still makes sense. Meredith reminds us to consider all the financial aspects of adding a mini house in our backyards. Here are some of the most important items to consider.

Rents Went Up More Than Interest Rates. In most areas in Southern California the increases in rental rates for an ADU more than make up for the increase in financing payments. In several cases, Meredith’s clients will net $200 MORE per month than they did with the lower interest rates (and lower rent payments). Also, don’t forget – your rent will increase over time.

Mortgage Interest Is Tax-Deductible. The mortgage interest on your ADU is usually tax-deductible and the ADU could qualify for a home office deduction. Of course, you must consult your personal tax professional for individual advice.

ADUs Build Wealth. An ADU contributes to the wealth-building power of your property. The positive cash flow can either fund your lifestyle or pay down your debt. At the same time, your property value will grow larger and faster.

Least Expensive Real Estate Investment. Existing homes sell (depending on where you are) between $800 – $1100 per square foot. On top of that, it costs money every time your buy or sell.

Rates Are Temporary, ADU is Permanent. Inflation is temporary and rates will come back down. You can always refinance your mortgage when that happens. And, history tells us that rates will fall during a recession.

adu financing options

ADU Financing Options For Four Different Situations

Add An ADU To Your Current Home

Adding a Backyard Home is the least expensive way to get the space (or extra income) you need. Buying a larger home or income property requires a lot more cash and higher monthly payments!

There are a number of ADU financing options for homeowners with more loan programs in the works.

If you currently have a very attractive fixed interest rate on your home mortgage you’ll want an ADU financing option that “sits behind” or is junior to your current loan. Here are two options.

  1. Interest Only Home Equity Line Of Credit (HELOC).
    • This is an adjustable loan that features a fixed interest rate for three or five years and adjusts no more than once a year. The rate increase is limited to half a percent in any given year.
    • Line of credit means you only pay interest on the amount of money you spend- and only as you spend it.
    • EXAMPLE: Today is July 1, 2020. If you had an excellent credit score and enough equity in your home, your interest rate would be 5.25%. A fully amortized monthly payment on a $300,000 loan is $1312. In our area (Montrose/La Crescenta) a one-bedroom ADU rents for $2500 – $3,000.
    • Adjustable-rate loans are a great ADU financing option and much safer than you might think. Interest rates typically go down in a recession and you are protected from massive inflation by the interest rate cap.
  2. Second Trust Deed To Finance Accessory Dwelling Unit.
    • The best ADU financing option for the risk-adverse because it is a fixed rate, amortized over 30 years. It is a much higher rate than the adjustable loan and, unlike the HELOC, the entire loan (and your payments) fund at once.
    • EXAMPLE: At today’s interest rates a $300,000 second trust deed monthly payment is $1847.
  3. ADU 203k Renovation Loan
    • Best ADU financing option if you haven’t built up a lot of equity
    • The renovation loan amount is up to 95% of the FUTURE value of the home after the ADU is added.
    • EXAMPLE: Your home is currently worth $650,000. Your proposed detached ADU adds $300,000 of future value to your home, so your renovation loan amount is 95% of $950,000 – or $902,000. If your current loan amount is less than $602,500, you could pay for the ADU construction with no additional money out of your pocket.
ADU Financing Options multi family

Multi-Family ADU Addition

Adding ADUs to existing multi-family properties is a no-brainer, from a business perspective. The additional income more than pays for the costs of the building project, but cash is always a concern.

A construction refinance is your best bet.

EXAMPLE: Today’s rate for zero down payment is 6.99%, interest-only for three years. The loan amount pays off the existing mortgage and all ADU construction costs.

Once your ADU is complete, refinance to a 5.25% rate that has interest-only payments. This loan qualifies based on total rents, not your personal income.

Single Family Home Purchase + ADU

This strategy employs the lowest cash investment possible. Obviously, there are a lot of other ADU financing options if you are working with a larger pool of cash.

  1. Use a Low Down Payment Purchase Loan
    • As we move into a more “balanced market”, there may be less competition for an available home. This means a well-qualified home buyer with a low down payment loan could get an accepted offer.
    • There are attractive, fixed and adjustable loans that require as little as 3% for a down payment. However, a 5% down payment avoids expensive private mortgage insurance. It is the wiser path if you can swing it.
  2. Use A Renovation Loan Once Permits Are Approved
    • Remember, a renovation loan covers the purchase price plus the anticipated improvement value. Permits will take months and It doesn’t make sense to pay on that larger loan before you can start building.
  3. Once The ADU Is Complete, Refi
    • In most cases, the renovation loan is more expensive than a conventional refinance. If this is your personal residence, use a conventional loan or and low down payment FHA loan. If this is an investment you could use a loan that qualifies based on total rents instead of personal income.

ADU Financing Option For Multi-Family Purchase

The ADU financing options steps for a multi-family purchase are the same as above. It is possible to purchase an owner-occupied multi-unit building with as little as a 3.5% down payment.

The big difference is that the renovation loan is not available for a multi-family property, so you will need to use a construction refinance loan product.

EXAMPLE: A low down payment ADU financing option can go up to 6 units! This means you could purchase a 4-plex and add two ADU units with very little money out of pocket.

California ADU Grants

The CalHFA ADU grant program is part of the $100 Billion dollar Come Back California Plan.

I recently did an in-depth interview with Molly Ellis from CalHFA. Click here to get the post and recording of the interview on the ADU grant program.

The ADU Grant provides up to $40,000 to reimburse pre-development and non-reoccurring closing costs associated with the construction of the ADU. Pre-development costs include site prep, architectural designs, permits, soil tests, impact fees, property survey, and energy reports.

This is a program for low or moderate income. In Los Angeles County the limit is $180,000.

California ADU financing

ADU Advice From An Expert

As I mentioned at the top of the article, Meredith has been involved in more ADU projects than anyone I know. She is a wealth of knowledge and experience. Here are some of her bits of wisdom shared today:

The low bid is dangerous! You are probably worried about shoddy workmanship, dishonesty, or mid-stream cost surprises. But, the biggest danger is the well-meaning contractor who is over-scheduled. This can lead to huge delays or even project abandonment.

Make sure your contractor has a deep track record and a reputation they don’t want to lose.

All ADU Companies Are New. The ADU laws have only been in effect since 2020. This means almost all ADU companies are “new”. Research the person/company who does the actual work and holds the construction license. Read: About ADU DIGGS, the people and the experience.

Remodelers Are Not The Same As Home Builders. ADUs are the hot, hot, trend in the home construction business. This means everyone wants “in” but not all contractors are equal. A remodeler might be fine for a garage conversion or JADU, but a quality detached ADU is literally the same as building an entire house.

Look for a contractor with home building experience. The resources, experience, and knowledge are critical to avoiding costly and inconvenient delays and cost overruns!

Pick An ADU Loan Specialist Many of the loan products we described are available to any mortgage professional- but the experience is not the same.

Meredith has access to private investors and loan products specifically targeted toward ADU financing options. Some of these products solve specific needs like self-employed or retirees with complicated or hard-to-document income. She also has access to a pool of specially trained appraisers who understand how to factor in the present or future value of an ADU and its rent potential.

But the biggest reason to work with an ADU Financing specialist like Meredith is that she functions as an additional set of eyes and ears to help you make the best decision and avoid mistakes.


Work with ADU DIGGS because we have decades of experience in designing, building, and selling quality homes. We are local and enjoy great reputations in our respective fields. Everything we do is designed to create customer satisfaction for a decade or more AFTER we deliver the keys.

Ready to chat? Schedule your free ADU consultation by clicking HERE.

Work With Meredith

You can reach Meredith Stowers at (616) 520-1018 or click here to schedule your adu financing options consultations: https://calendly.com/mestowers