How do you finance an ADU in California?

The short answer is under the title. The longer one starts with the house you already have. If you are still deciding between an ADU and a room addition, compare them first. A room addition is not a second unit you can rent.

If that house has equity, three common tools use it: a cash-out refinance, a home equity loan, and a HELOC. They are not interchangeable. A cash-out refinance pays off the mortgage you have and replaces it. A home equity loan or a HELOC usually sits beside the first mortgage as a second loan. The Consumer Financial Protection Bureau explains that second position, and the risk that comes with it: if you cannot repay, you can lose the house, because the house is the collateral.

If the work itself needs to be inside a first mortgage, look at a renovation loan or a construction loan. Fannie Mae, Freddie Mac, and FHA each publish a version. They do not all allow the same ADU. A garage conversion, an attached addition, a new detached unit, and a brand-new house that happens to include an ADU can be four different applications.

A personal loan is the tool for a gap, not for the whole build. It does not use the house as collateral. The CFPB notes that credit of that kind can come with a lower limit and a higher rate than a HELOC.

The grant people still search for, the CalHFA ADU Grant, is closed to new applicants. Budget a loan or cash, not that check. The sections below say who each option tends to fit, what the official rule actually says, and where a lender's worksheet will not match a city planning counter.

What are ADU loans in California?

There is no single product named "ADU loan" that every California bank has to offer. Homeowners use the phrase for any mortgage, equity line, or renovation loan a lender will fund for the project. The public rulebooks that mention ADUs by name are Fannie Mae's Selling Guide, Freddie Mac's Seller/Servicer Guide, and FHA's Single Family Housing Policy Handbook 4000.1.

A lender that keeps the loan on its own books can write its own rules. Those rules are not one statewide standard, so this page does not pretend to list them. The useful question at the first call is: "Are you underwriting this to Fannie Mae, Freddie Mac, FHA, or a portfolio loan you will keep?" The answer decides whether expected rent can help you qualify.

City rules and lender rules are allowed to disagree. California lets many single-family lots add an ADU, and often a junior ADU as well. Fannie Mae's property rules, in Selling Guide B2-3-04, allow only one ADU on the parcel of a one-unit primary home, and they do not allow an ADU with a two- to four-unit property. Fannie Mae's ADU page says the same thing in shorter form: properties with more than one ADU are not eligible for Fannie Mae financing, and an ADU is not eligible when the primary home is a manufactured home. Freddie Mac's ADU page allows one ADU on a 1-unit, 2-unit, or 3-unit property when zoning is legal, legal nonconforming, or the area has no zoning.

If your plan is an ADU plus a junior ADU, or a new unit on a small multifamily lot, ask the lender which unit it can count before you pay for plans. A junior ADU that a city accepts may still fail a lender's definition of a full ADU. Fannie Mae, for example, expects a separate entrance, a sleeping area, a bathroom, and a kitchen with cabinets, a counter, a sink, and a stove or stove hookup. A hot plate does not qualify as that stove.

This page does not list lenders and does not take applications. A company that wants to advertise can contact the site. Nothing on this page is an endorsement of a lender.

What is a cash-out refinance?

A cash-out refinance replaces the mortgage on your house with a new, larger mortgage. You take the difference in cash, if the lender agrees the equity is there. The CFPB's comparison with a HELOC puts it that plainly, and it adds two cautions: you often pay closing costs, and you should look hard at the new interest rate when it is higher than the rate you already have.

That second point is the one that surprises people. The new rate applies to the whole balance, not just the ADU money. If your current mortgage is a low fixed rate, replacing it can raise the payment on debt you were already comfortable with. Run that comparison before you celebrate the cash.

Who a cash-out refinance tends to fit

  • You have enough equity that the lender will lend the ADU budget on top of the payoff.
  • You want one payment, not a first mortgage plus a second.
  • The new rate and the closing costs still make sense next to the loan you would be giving up.
  • You can qualify on your income without counting future ADU rent. On the big agency programs, cash-out is the version that usually cannot use that rent. See the rental-income section.

FHA's cash-out rules are tighter than a generic description. Handbook 4000.1 says an FHA cash-out is only for an owner-occupied principal residence, and at least one borrower has to have owned and lived there as a principal residence for the 12 months before the case number is assigned. The same section says rental income from an ADU cannot be used as effective income to qualify for a cash-out refinance. That applies to both automated and manual underwriting.

The rate itself is whatever the lender quotes that day. This page does not publish a market rate. Ask for a Loan Estimate and compare the annual percentage rate, the cash you actually receive, and the payment on the full new balance.

What is the difference between a HELOC and a home equity loan?

Both borrow against equity. The shape of the debt is different.

A HELOC is an open-end line. During the draw period you can borrow, repay, and borrow again, up to the limit. The CFPB's HELOC explainer says the rate is usually variable, so the payment can change, and that once the draw period ends you generally cannot borrow anymore. Payments in the repayment period are often much higher. Some lines let you convert part of the balance to a fixed rate. The fixed rate is usually higher than the variable rate, and it is more predictable. The draw period is whatever the agreement says. The CFPB uses 10 years as an example, not as a rule.

A home equity loan is a lump sum. The CFPB's comparison says you may have a fixed or an adjustable rate, and that if you already have a mortgage, both products are second mortgages with their own monthly payment. The CFPB also says second mortgages often carry higher rates than first mortgages, because the second lender is paid after the first if the house is sold in foreclosure.

A HELOC tends to fit when

  • The contractor will bill you in stages and you would rather not borrow the whole budget on day one.
  • You can live with a payment that moves when the rate moves.
  • You have a plan for the repayment period, when the payment often steps up.
  • You understand the house is collateral.

A home equity loan tends to fit when

  • You want the ADU money in one check, often to sign a construction contract.
  • You want a payment you can write into a budget, which is easier when the rate is fixed.
  • You can carry that payment beside the first mortgage.
  • You are not trying to keep the option to redraw later.

Neither product, in the CFPB's description, is an "ADU rent" program. Fannie Mae, Freddie Mac, and FHA rental-income rules apply when the loan is being made under those programs. A HELOC lender uses its own guideline. Ask whether rent from a unit that does not exist yet can be counted, and ask for the answer in the approval, not only on the phone.

Interest on a home-secured loan is not automatically a tax deduction. How you use the money, and the tax year you are filing, both matter. IRS Publication 936 is the federal starting point for home mortgage interest. California tax rules are separate. A tax professional should look at your return before you count on a deduction.

What is an ADU construction loan?

A construction loan pays for a building that is not finished. The lender holds the money and releases it as work is done, rather than handing you the full budget at the start. When people say "ADU construction financing," they usually mean this kind of loan, or a renovation loan that behaves like one.

A construction-to-permanent loan is the version that is designed to become a regular mortgage. Fannie Mae's Selling Guide, in B5-3.1-01, describes it as long-term financing that replaces interim construction money used to build a new residence. It can be one closing or two.

In a single closing, the construction loan and the permanent loan close together, and the construction loan converts when the work is done. B5-3.1-02 says that single-closing loan may be a purchase or a limited cash-out refinance. The construction period may have no single period longer than 12 months, and the total period may not exceed 18 months. Fannie Mae does not buy the loan until construction is complete and the loan has converted. The permanent term after that conversion cannot exceed 30 years, not counting the construction period.

In a two-closing loan, the construction loan and the permanent mortgage are separate. Selling Guide B5-3.1-03 says Fannie Mae does not buy the construction loan. It can buy the permanent loan, which may be a limited cash-out refinance or a cash-out refinance. For the cash-out version, the borrower has to have held title to the lot for at least six months before the permanent loan closes.

HCD's March 2026 ADU Handbook points to Fannie Mae construction-to-permanent financing as a way to build a home that includes an ADU. That is a different job from adding a backyard unit behind a house you already live in and already mortgage. Some lenders will still structure an ADU addition as construction financing. Some will tell you to use a renovation mortgage or a HELOC. Ask which one they mean before you pay a construction-loan fee. The rate during construction and the rate on the permanent loan can be two different quotes. Get both.

A construction loan is a poor fit if you need the lender to count rent from a unit that will not be livable for many months. Freddie Mac is explicit about that timing. The rental-income section covers it.

Can a renovation loan pay for an ADU?

Sometimes, and the product name matters. A renovation loan puts repair or improvement money inside a mortgage. It is not automatically a permit to build any ADU the city would allow.

Fannie Mae HomeStyle Renovation

Selling Guide B5-3.2-01 says HomeStyle Renovation lets a borrower buy a home or refinance, and include funds for repairs, remodeling, renovations, or energy improvements. Improvements generally have to be permanently attached to the property. The guide says the loan may be used to construct outdoor buildings when local zoning allows, and it lists accessory units among the examples, along with garages and similar structures. It also says HomeStyle may not be used to tear a house down and rebuild it.

The HomeStyle FAQ, updated December 10, 2025, answers two questions that get mixed up. A detached accessory unit is allowed, if it meets local codes and the Selling Guide's ADU rules. Building another residential dwelling on the parcel is not allowed. A manufactured home can be purchased and installed as an ADU under extra conditions, including conversion to real property. Read those as three different answers: a detached ADU can fit, a second primary house does not, and a factory-built ADU has its own checklist.

Work has to be finished no later than 15 months after the loan closes. A lender that delivers the loan to Fannie Mae before the work is done needs special approval and delivers it with recourse. A lender that waits until the renovation is complete does not need that special approval. You do not control that choice, but you should know why one lender says yes and another says the project has to be done first.

Freddie Mac CHOICERenovation

Freddie Mac's ADU page says borrowers can use a CHOICERenovation mortgage to add a new ADU or renovate an existing one. The page gives a garage, barn, or shed conversion as the kind of project it has in mind, and it also points to CHOICERenovation for a factory-built ADU. That is broader than "paint and a kitchen." It is still the lender's loan. Zoning has to allow the unit.

FHA 203(k)

FHA's Standard 203(k) is the rehab loan that the handbook actually ties to new ADU work. Handbook 4000.1, in the 203(k) section, lists these among eligible Standard 203(k) improvements: converting a one-family house into a one-family house with an ADU, adding an ADU that will be attached to an existing structure, and renovating an existing ADU that is attached or unattached. HCD's March 2026 handbook repeats the practical limit: the 203(k) may only be used to construct an attached ADU. A brand-new detached backyard building is not what that sentence describes. Renovating a detached ADU that is already there is on the list. Adding a new attached unit is on the list.

Standard 203(k) has a minimum repair cost of $5,000 and requires an FHA-approved 203(k) consultant. The property has to have been completed for at least one year before the case number is assigned. Limited 203(k) is the other flavor. The handbook says it is for minor remodeling and nonstructural repairs, and that total rehabilitation costs must not exceed $75,000. HUD reviews that dollar cap. Mortgagee Letter 2026-06, dated June 23, 2026, still describes the $75,000 figure as the limit set in 2024, and it says Limited 203(k) proceeds may not finance major rehabilitation. The letter treats work that needs plans or architectural exhibits as major. A new ADU that needs drawings belongs in that major category, so Limited 203(k) is the wrong box for it even before you test the dollar cap.

FHA loans include mortgage insurance. The premium is HUD's, and it changes with the loan. Ask the lender for the current premium rather than using a percentage you saw on an old blog.

If the project is a new detached unit and the lender only offers FHA, ask whether any FHA program on that lender's menu can build a detached ADU, or whether you need a different product. Do not let a salesperson relabel a Limited 203(k) as an ADU construction loan.

Can projected ADU rental income help you qualify?

Sometimes, on a one-unit primary home, and only inside the rule of the program the lender is using. "The rent will cover the payment" is not a guideline. The guideline is a percentage, a transaction type, and a stack of paperwork.

Fannie Mae

Selling Guide Announcement SEL-2025-08, dated October 8, 2025, says ADU rental income may count toward qualifying income only when all of these are true: the property is a one-unit principal residence, the loan is a purchase or a limited cash-out refinance, the rent comes from only one ADU even if the property has more than one, and the ADU rent used for qualifying is limited to 30 percent of the borrower's total qualifying income. The rest of the Selling Guide's rental-income documentation still applies. A cash-out refinance is outside that announcement.

Selling Guide B3-3.8-02, dated September 2, 2026, includes a one-unit property with an ADU, paired with a one-unit primary residence, among the properties that can have subject-property rental income. On a purchase, the calculation it describes starts by taking 75 percent of monthly gross rent, then subtracting the housing payment, and then it treats the result differently if you have managed rentals for less than 12 months. That worksheet is not the same as FHA's. Your lender has to follow the guide section that matches the loan, not a blended version from a webpage.

Freddie Mac

Freddie Mac's ADU fact sheet says rental income from an ADU on a subject 1-unit primary residence may be used on a purchase or a no-cash-out refinance. Rent documented with a lease must not exceed 75 percent of the lease amount. Qualifying rental income cannot exceed 30 percent of the total income used to qualify. The ADU has to be legal under zoning. Rent from an illegal unit may not be used. The fact sheet also says an appraisal is required when that rent is used, with at least one comparable sale that has an ADU, and a rental analysis with at least three comparable rents, one of them a rented ADU.

The timing rule is the one that knocks out a lot of construction projects. Freddie Mac's Guide FAQ, citing Section 5306.1, says the rental payments have to begin on or before the first mortgage payment if you want the rent in the debt-to-income ratio. If the lease does not start until after that date, because the ADU is still being built or renovated, the projected rent cannot be used. A CHOICERenovation loan that creates the ADU does not get a special exception in that answer.

FHA

Handbook 4000.1 allows ADU rent on a one-unit property, with a cap. Where the borrower does not have a history of rental income from the property since the previous tax filing, the mortgagee uses 75 percent of the lesser of the appraiser's fair market rent or the rent in the lease. The amount of ADU rent used as effective income must not exceed 30 percent of the total monthly effective income used to qualify the borrower. If that rent is being used to qualify, the handbook also calls for reserves equal to two months of PITI after closing on a one-unit property with an ADU.

Inside the 203(k) section, the no-history calculation is stricter: 50 percent of the lesser of fair market rent or the lease, not 75 percent. And on a cash-out refinance, ADU rent cannot be used as effective income at all.

Put the three programs next to each other and the pattern is the same even though the math differs. Expected rent is a maybe on a purchase or a limited, no-cash-out refinance of a primary home. It is a no, on these published rules, when the loan is a cash-out refinance. It is also a no at Freddie Mac while the unit is still a job site and the lease has not started. A portfolio lender can be more generous or less. Get the guideline name in writing.

When does a personal loan fit an ADU, and when does it not?

A personal loan, or a personal line of credit, is based on your credit rather than a mortgage on the house. The CFPB says limits may be lower, and rates may be higher, than a HELOC or another loan that uses the home as collateral. That is the trade. You are not pledging the house in the loan contract. You also should not expect the line to be large enough to build an ADU.

It can fit a leftover gap: the last part of a contract after equity and cash are spoken for, or a homeowner who will not, or cannot, add a lien. It does not fit as the plan for the whole project. Lenders set their own maximums. This page will not invent one. If the approval is smaller than the bid, the personal loan did not finance the ADU. It financed a slice, and you still need the rest.

Read the term. A short personal loan can have a higher monthly payment than a 30-year mortgage on a larger amount. The payment, not the rate sticker, is what has to fit the household budget.

What is the CalHFA ADU Grant Program?

It was a state reimbursement program, not a loan. CalHFA's ADU page, reviewed on October 27, 2026, says the program provided grants up to $40,000 to reimburse pre-development and non-recurring closing costs tied to building an ADU. The costs it names are site prep, architectural designs, permits, soil tests, impact fees, property surveys, and energy reports.

The same page's program update, dated December 28, 2023, says the latest round of ADU funding has been fully allocated. Program Bulletin 2023-14, the same day, says the funds for the application window that opened on December 11, 2023, were exhausted and the reservation portal is closed. CalHFA tells readers that anyone who offers to get them the grant is running a financial scam. Do not engage. If they leave a name or a phone number, CalHFA asks you to forward it to marketing@calhfa.ca.gov.

HCD's March 2026 ADU Handbook says the same thing from the state's housing department: at the time of that writing the funds were exhausted. The handbook describes the old grant as up to $40,000 for qualifying homeowners, for predevelopment costs of an ADU or junior ADU on a lot with an owner-occupied single-family home. That is a description of a closed program, not an application you can file.

Who qualifies for a California ADU grant?

No one new qualifies for the CalHFA ADU Grant, because CalHFA is not taking applications. Older articles that listed income limits, a "first ADU" rule, or a step-by-step reservation process were written for a round that has been fully allocated. Do not use them as a checklist. There is nothing to reserve.

HCD's handbook says some local agencies create their own help for predevelopment or construction, or they waive fees, and it points readers to HCD's ADU page for funding information: hcd.ca.gov/building-standards/adu. A program name on that page is not proof it is open, funded, or available to you. Call the city, the county, or the agency and ask whether applications are being accepted before you put the money in a budget.

HCD also describes programs aimed at local governments, including CalHome, the Permanent Local Housing Allocation, the Prohousing Incentive Program, and the Local Housing Trust Fund. Those are not homeowner grants you apply for on CalHFA's closed portal. If a contractor or a lender says they can still "pull the CalHFA grant," that is the pitch CalHFA told people to treat as a scam.

A longer status note, with the same conclusion, is on our CalHFA grant page.

How do these ADU financing options compare?

This table has no interest-rate numbers. Rates move, and this page does not quote them. "What the rate is like" is a description from the source named in that row. Every row still depends on the lender's credit decision, the equity, and the project.

Option What it is Who it tends to fit What the rate is like Can expected ADU rent help you qualify?
Cash-out refinance A new, larger mortgage replaces the one you have. You take the difference in cash if the equity is there. You have equity, you want one payment, and the new rate still makes sense against the loan you would give up. The lender quotes it. CFPB says compare it with your current rate. Closing costs are common. It is not automatically a lower rate. No on an FHA cash-out. Fannie Mae's 2025 ADU rent rule is purchase and limited cash-out only. Freddie Mac's 1-unit primary rule is purchase and no-cash-out.
HELOC A revolving line secured by the house. You draw as bills arrive, up to a limit. The project is paid in stages, and you can handle a payment that can change. Usually variable, per the CFPB. The payment often jumps when the draw period ends. Not an agency rule. The lender of that line decides. Ask in writing.
Home equity loan A lump sum, usually a second mortgage, repaid in installments. You want one check and a payment you can plan, beside the first mortgage. Fixed or adjustable. CFPB says second mortgages often cost more in rate than first mortgages. Same as a HELOC: the lender's own rule, not the Fannie, Freddie, or FHA worksheets.
Fannie Mae HomeStyle Renovation A first mortgage that includes renovation money. Accessory units are an allowed improvement when zoning allows. A conversion, an accessory unit, or similar work, and you want that money inside one first mortgage. The lender quotes the mortgage rate. This page does not. Only under Fannie Mae's rental-income rules, including the 30 percent cap and the purchase or limited cash-out limit in SEL-2025-08.
Freddie Mac CHOICERenovation A Freddie Mac renovation mortgage. Freddie Mac says it can add a new ADU or renovate one, including a garage conversion or a factory-built unit. You want the ADU money inside a Freddie Mac loan, and the unit will be legal under local zoning. The lender quotes it. On a 1-unit primary home: purchase or no-cash-out, rent starts by the first payment, lease haircut and a 30 percent income cap on the fact sheet.
FHA Standard 203(k) An FHA rehab loan. The handbook lists an attached ADU addition, a conversion that creates an ADU, and renovation of an existing attached or detached ADU. The house is at least a year old, repairs are at least $5,000, and the ADU work matches that attached or existing-unit list. The lender quotes the FHA rate. Budget for FHA mortgage insurance as well. Ask for the current premium. With no rental history, the 203(k) section uses 50 percent of the lesser of market rent or the lease, then the 30 percent income cap. Not on a cash-out.
FHA Limited 203(k) Minor, nonstructural repairs. Handbook cap of $75,000, which HUD reviews. Major work, including work that needs plans, is outside it. A small nonstructural repair. Not a new ADU that needs architectural drawings. The lender quotes it, plus FHA mortgage insurance. Do not choose this product in order to count ADU rent on a unit it cannot build.
Construction-to-permanent Interim construction money that converts to a mortgage, in one closing or two. Fannie Mae's guide is written for construction of a residence. You are building a home, including a home with an ADU, and the lender offers this structure. Ask before assuming it fits a backyard addition. The construction period and the permanent loan can be quoted separately. Depends on the permanent program. Freddie Mac will not count rent that starts after the first payment.
Personal loan Unsecured credit. The house is not the collateral in the contract. A gap, and only if the amount offered actually covers that gap. CFPB: limits may be lower and rates may be higher than a HELOC. The lender sets both. This is not an ADU-rent program. The lender looks at your credit and income.
CalHFA ADU Grant Was a reimbursement of up to $40,000 for pre-development and non-recurring closing costs. Closed. No new applicants. Latest round fully allocated December 28, 2023. Not a loan. There is no rate. Not applicable. Do not underwrite your budget to a grant you cannot get.

How should you use an ADU loan calculator?

An ADU loan calculator is only as honest as the numbers you type in. A slider that invents a cost from square footage is not a bid, and a preset interest rate is not a quote. Use a calculator to test a Loan Estimate you already have: the rate, the term, and the loan amount on that form. Then add taxes, insurance, and mortgage insurance from real bills or from that same estimate. Label the printout as a planning estimate. It will change if the bid changes, if the rate lock changes, or if the city requires work you had not drawn.

A hypothetical planning estimate

Everything in this box is an assumption, chosen so the arithmetic is easy to follow. It is not a loan offer, not a construction bid, and not a rent survey for any California city. It depends on the site, the contractor's price, the rate a lender will actually lock, the term, property taxes, insurance, and any mortgage insurance.

  • Assumed project budget: $250,000. A real budget depends on whether this is a garage conversion or a new building, on utilities, design, finishes, and the city.
  • Assumed cash already set aside: $40,000.
  • Assumed amount to finance: $210,000.
  • Assumed fixed rate: 7 percent. Assumed term: 30 years. Those two figures are not a market quote on October 27, 2026.

On a standard fully amortizing loan, monthly principal and interest on $210,000 at 7 percent for 30 years is $1,397.14. The same assumed loan at 6 percent is $1,259.06. At 8 percent it is $1,540.91. A two-point swing in that assumed rate changes the principal-and-interest payment by about $282 a month. That is why the rate on your own Loan Estimate matters more than any number a website fills in for you.

That payment does not include property taxes, homeowners insurance, mortgage insurance, or HOA dues. Those depend on the county, the insurer, the loan program, and the building. A HELOC would not produce this fixed payment. The CFPB says HELOC rates are usually variable, and the payment can rise again when the draw period ends.

Now the rent, also made up for the example. Suppose the appraiser's fair market rent and the lease are both $2,000 a month. Do not use $2,000 as a California rent figure.

  • Seventy-five percent of $2,000 is $1,500. Fifty percent is $1,000.
  • FHA, with no rental history since the last tax filing, uses 75 percent of the lesser of market rent and the lease, then caps ADU rent at 30 percent of total monthly effective income. On a 203(k), that no-history step is 50 percent, not 75.
  • $1,500 is 30 percent of $5,000. If the rest of qualifying income is $2,000 a month, putting the full $1,500 on top would make $3,500, and $1,500 is about 43 percent of $3,500. That is over the cap, so the lender would have to count less of the rent.
  • Fannie Mae's October 8, 2025 announcement caps ADU rent used for qualifying at 30 percent of total qualifying income, and only for a purchase or limited cash-out refinance of a one-unit principal residence. The lender still runs the Selling Guide calculation on top of that cap.
  • Freddie Mac will not use the $2,000 for qualifying at all if the lease does not start until after the first mortgage payment. That is the usual case while the ADU is still being built.

None of this math says the household qualifies. The lender still runs credit, the full debt-to-income ratio, and the appraisal.

What fees and taxes still sit outside the loan?

The loan does not erase city fees. Government Code section 66311.5 is the impact-fee rule, and it is narrower than "ADUs are free to permit."

A local agency, special district, or water corporation cannot charge an impact fee on an ADU of 750 square feet of interior livable space or less, or on a junior ADU of 500 square feet of interior livable space or less. An ADU larger than 750 square feet is charged in proportion to the primary house. Starting January 1, 2027, SB 1117 (Cervantes), Chapter 809, Statutes of 2026 keeps the no-fee rule for an ADU of 750 square feet of interior livable space or less, and for a junior ADU of 500 square feet or less. On a lot with up to two ADUs, an impact fee on a larger ADU is still charged in proportion to the main home, and only on the square feet above 750. A lot with more than two ADUs keeps today's proportional rule on the whole unit. The change applies to charter cities. It does not set a dollar amount, and connection charges stay separate. Local ordinances have to follow it on that date. Ask your city before you budget a fee. The March 2026 HCD handbook does not cover this bill yet. See the 2026 law update. In the statute, "impact fee" does not include a connection fee or a capacity charge. The section also does not waive the building-permit fee. Budget that fee with the building counter, not from this page. Permit amounts depend on the city and the valuation they use.

Utility hookups are their own paragraph in the same section. An ADU or junior ADU is not treated as a new residential use for connection fees or capacity charges unless it was built with a new single-family house. Some other ADUs can still be required to take a separate connection and pay a proportionate charge. The ADUs described in section 66323(a)(1) are treated more strictly in the homeowner's favor, with the exceptions written in the statute, including separate sale of the unit. Ask the building counter which subsection your plans fall under before you assume a hookup is free or that it is required.

Do not read the 750-square-foot impact-fee rule as a property-tax exemption. It is a fee rule. Rent you collect is income. What you can deduct, including interest, depends on your facts and the tax year. Start with IRS Publication 527 for residential rental property and Publication 936 for mortgage interest, then talk to a tax professional. Build cost is a separate question from the loan. Our cost guide is about the bid. Treat any dollar range there as a planning estimate that depends on the site. For payback by ADU type, and the cases where the numbers do not work, see whether an ADU is worth it in 2026. The planning guide and the legal guide cover the permit path that has to be real before a renovation lender will release funds.

Questions homeowners ask

How do you finance an ADU in California?

Most homeowners use equity in the house they already own, through a HELOC, a home equity loan, or a cash-out refinance. A renovation loan or a construction loan can pay for the work itself. Some mortgage programs let the lender count part of the ADU's rent, and only when that program's rules allow it. The CalHFA ADU grant is not open to new applicants.

What is an ADU construction loan?

A construction loan pays for a building that is not finished yet. The lender usually releases money as work is completed. A construction-to-permanent loan is set up to turn that short-term financing into a regular mortgage, in one closing or in two. Fannie Mae's single-closing version is a purchase or a limited cash-out refinance, and the construction period has to stay inside the time limits in the Selling Guide. Ask the lender whether it will use that structure for a backyard ADU before you apply.

Can you use ADU rental income to qualify for a loan?

Sometimes. Fannie Mae, Freddie Mac, and FHA each allow some ADU rent on a one-unit primary home, with different caps, and with different rules when the unit is not built yet. FHA does not let you use ADU rent to qualify on a cash-out refinance. Freddie Mac does not let you use rent that starts after the first mortgage payment, which is common while an ADU is still being built. A HELOC lender sets its own rule. Get that answer in writing.

Is the CalHFA ADU Grant Program open?

No. CalHFA says the latest round was fully allocated on December 28, 2023, and that anyone offering to get you the grant is running a financial scam. HCD's March 2026 ADU Handbook also says the funds were exhausted at the time of that writing. The old grant reimbursed up to $40,000 of pre-development and non-recurring closing costs.

Who qualifies for a California ADU grant?

There is no open statewide ADU grant to qualify for. CalHFA is not taking new applications, so older income limits are not a checklist you can use today. Some cities and counties run their own programs. A name on HCD's ADU page is not proof a program is open or that you qualify. Call that agency before you put grant money in the budget.

Sources

Every source below was accessed on October 27, 2026. Guidelines change. The lender's current overlay controls your loan.

  1. CalHFA, ADU Grant Program. calhfa.ca.gov/adu/index.htm. Accessed October 27, 2026. Up to $40,000 for pre-development and non-recurring closing costs. Update dated December 28, 2023: latest round fully allocated. Scam warning.
  2. CalHFA Program Bulletin 2023-14, December 28, 2023. PDF. Accessed October 27, 2026. Funds for the window that opened December 11, 2023, exhausted. Reservation portal closed.
  3. California Department of Housing and Community Development, Accessory Dwelling Unit Handbook, March 2026. PDF. Accessed October 27, 2026. Grant funds exhausted at the time of writing. Describes the old grant, FHA 203(k) for an attached ADU, and Fannie Mae construction-to-permanent financing for a home with an ADU.
  4. HCD ADU page, linked from that handbook. hcd.ca.gov/building-standards/adu. Accessed October 27, 2026.
  5. California Government Code section 66311.5. leginfo.legislature.ca.gov. Accessed October 27, 2026. Impact fees, and what that section does not waive.
  6. Consumer Financial Protection Bureau, "What is a home equity line of credit (HELOC)?" Ask CFPB. Accessed October 27, 2026.
  7. Consumer Financial Protection Bureau, home equity loan compared with a HELOC. Ask CFPB. Accessed October 27, 2026.
  8. Consumer Financial Protection Bureau, second mortgages. Ask CFPB. Accessed October 27, 2026.
  9. Consumer Financial Protection Bureau, cash-out refinance and personal lines of credit compared with a HELOC. Ask CFPB. Accessed October 27, 2026.
  10. Fannie Mae Selling Guide B5-3.2-01, HomeStyle Renovation. selling-guide.fanniemae.com. Accessed October 27, 2026.
  11. Fannie Mae, HomeStyle Renovation FAQ, updated December 10, 2025. singlefamily.fanniemae.com. Accessed October 27, 2026.
  12. Fannie Mae Selling Guide B2-3-04, accessory dwelling units. selling-guide.fanniemae.com. Accessed October 27, 2026.
  13. Fannie Mae, Accessory Dwelling Units product page. singlefamily.fanniemae.com. Accessed October 27, 2026.
  14. Fannie Mae Selling Guide Announcement SEL-2025-08, October 8, 2025. singlefamily.fanniemae.com. Accessed October 27, 2026. ADU rental income: one unit, principal residence, purchase or limited cash-out, one ADU, 30 percent of qualifying income.
  15. Fannie Mae Selling Guide B3-3.8-02, Rental Income from the Subject Property, dated September 2, 2026. selling-guide.fanniemae.com. Accessed October 27, 2026.
  16. Fannie Mae Selling Guide B5-3.1-01, B5-3.1-02, and B5-3.1-03, construction-to-permanent financing. Overview, single-closing, and two-closing. Accessed October 27, 2026.
  17. Freddie Mac Single-Family, Accessory Dwelling Units. sf.freddiemac.com. Accessed October 27, 2026.
  18. Freddie Mac, Accessory Dwelling Units fact sheet. PDF. Accessed October 27, 2026.
  19. Freddie Mac Seller/Servicer Guide FAQ on projected ADU rent, citing Section 5306.1. guide.freddiemac.com. Accessed October 27, 2026.
  20. FHA Single Family Housing Policy Handbook 4000.1, transmittal issued August 13, 2025, including the 203(k) section dated April 10, 2025, and the refinance section dated May 25, 2025. Handbook PDF. Accessed October 27, 2026. ADU rent percentages, cash-out prohibition, and 203(k) improvement types.
  21. HUD Mortgagee Letter 2023-17, October 16, 2023, the ADU rental-income and 203(k) policy later carried into Handbook 4000.1. PDF. Accessed October 27, 2026.
  22. HUD Mortgagee Letter 2026-06, June 23, 2026. PDF. Accessed October 27, 2026. Limited 203(k) draw rules, and the description of the $75,000 rehabilitation cap and of major work.
  23. IRS Publication 936, Home Mortgage Interest Deduction. irs.gov. Accessed October 27, 2026.
  24. IRS Publication 527, Residential Rental Property. irs.gov. Accessed October 27, 2026.

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