How to finance an ADU in California.
Accessory dwelling units are legal statewide, but most lenders still treat them awkwardly. Here are the loan options that actually fund a Sacramento-area ADU, what each one is based on, and how rental income factors in.
The short answer
The two strongest ways to finance a California ADU are a renovation loan (FHA 203(k) or Fannie Mae HomeStyle) that lends against the home's after-completion value, or a cash-out refinance/HELOC if you already have enough equity today. Renovation loans are the right tool when you don't have the equity yet, because the appraiser values the property as if the ADU is already built.
Your real financing options, compared
| Option | How much | Valued on |
|---|---|---|
| FHA 203(k) renovation loan | Up to county FHA limit | After-renovation value |
| Fannie Mae HomeStyle Renovation | Up to conforming limit | After-renovation value |
| Cash-out refinance | Up to 80% LTV | Current value |
| HELOC / home equity loan | Typically 80-85% CLTV | Current value |
| Construction-to-permanent | Varies by lender | After-completion value |
The distinction that matters: renovation and construction loans size off the value after the ADU exists. Cash-out refis and HELOCs only see what your home is worth today.
Buying a home and building the ADU in one loan
You can combine the purchase and the ADU build into a single mortgage with one closing and one payment:
- FHA 203(k): 3.5% down, 580+ FICO, based on the after-renovation value. Sacramento-area FHA limit for 2026 is $764,750. Requires a HUD consultant on larger projects.
- HomeStyle Renovation: 5% down for owner-occupants, 620+ FICO, renovation budget up to 75% of the after-completion value. Conforming limit is $832,750 in the Sacramento metro.
See the details on the renovation loan page or the construction loan page for ground-up detached builds.
Does projected ADU rent help you qualify?
Sometimes. Fannie Mae allows projected rental income from an ADU on a one-unit property in specific renovation and purchase scenarios, typically counting about 75% of the appraiser's market rent. FHA is more restrictive on single-family ADUs. In practice:
- Existing, permitted, and rented ADU with a lease: strongest case for using the income.
- Planned ADU under a renovation loan: possible, but lender-specific.
- Unpermitted conversion: generally no income credit and often a lending problem.
Permits matter more than anything else here. An unpermitted unit can sink both the appraisal and the loan.
What ADUs actually cost in the Sacramento area
- Garage conversion: often the cheapest path, existing footprint and utilities.
- Attached addition: mid-range, shares walls and some systems with the main house.
- Detached new build: most expensive, needs its own foundation, utilities, and setbacks.
Budget beyond construction for design, city permits and impact fees, utility connections, and a contingency reserve - renovation loans require one. Get a contractor bid before we size the loan; the bid drives everything.
Model the payment impact in the monthly payment calculator.
Frequently asked questions
Can I get a loan to build an ADU if I don't have equity yet?+
Yes. A renovation loan such as FHA 203(k) or Fannie Mae HomeStyle sizes the loan off the home's after-completion value, so you can finance the ADU before the equity exists.
Can I buy a house and build an ADU with the same mortgage?+
Yes. FHA 203(k) at 3.5% down or HomeStyle Renovation at 5% down roll the purchase and the ADU construction into one loan with one closing and one monthly payment.
Will the future ADU rent help me qualify?+
Sometimes. Conventional guidelines allow roughly 75% of appraised market rent in certain one-unit ADU scenarios. An existing, permitted, leased ADU is the strongest case; unpermitted units get no credit.
Do I need permits for ADU financing?+
Yes. Lenders and appraisers need the ADU to be legally permitted. Unpermitted conversions typically can't be financed and can hurt the appraisal of the whole property.
Is a HELOC or a renovation loan better for an ADU?+
A HELOC is faster and cheaper if you already have the equity and want to keep a low first-mortgage rate. A renovation loan is the answer when your current equity isn't enough to cover the build.
Can I use a construction loan for a detached ADU?+
Yes. A construction-to-permanent loan works for ground-up detached ADUs, funding in draws during the build and converting to a standard mortgage at completion.