An accessory dwelling unit (ADU) is a great way to increase the value of your property, accommodate multi-generational living, or collect rental income.
However, regardless of your ADU’s potential to make money or meet your family’s space needs, you must first determine how to pay for it.
Fair warning: ADU financing won’t look the same for all homeowners.
But don’t worry–we’ll take an in-depth look at your ADU financing options, what it takes to qualify, and what you can expect to pay.
Can I Get a Loan for an ADU?
A loan for an ADU is entirely possible, but lenders evaluate key factors before approval. Your credit score, typically 620+ (with 680+ preferred), and debt-to-income (DTI) ratio (usually under 43%) are the two most important factors in securing financing for an ADU.
If you have enough home equity and your first mortgage is not too large, you may qualify for a home equity loan, HELOC, or cash-out refinance.
For those without sufficient equity, a construction or renovation loan is an additional option. The construction or renovation loans base borrowing limits on future property value.
(Note: While some homeowners opt for personal loans, these often come with higher interest rates and shorter terms–so tread lightly).
The right financing option ultimately depends on your existing mortgage, borrowing power, and long-term financial goals.
ADU Financing Options (Interest Rates and Loan Terms)
Interest rates vary depending on the accessory dwelling unit finance option you choose. Most homeowners find the best rates with a home equity loan, which is typically in the 5-9% range. Personal loans are the most expensive option from an interest rate perspective.
Estimated Monthly Payments for a $100,000 Loan (15-Year Term)
| Financing Option | Approx. Interest Rates | Typical Loan Terms | 15-Year Estimated Payment |
| Home Equity Loan | 5% – 9% | 10–30 years | $790.79 – $1014.27 |
| HELOC (Home Equity Line of Credit) | 6% – 10% | 10–15 years (draw period) + repayment period | $843.86 – $1074.61 |
| Cash-Out Refinance | 5% – 8% | 10–30 years | $790.79 – $955.65 |
| Construction Loan | 6% – 10% | Varies | $843.86 – $1074.61 |
| Renovation Loan | 6% – 10% | 10–30 years | $843.86 – $1074.61 |
Note: Interest rates vary based on credit score, debt-to-income ratio, and market conditions.
Financing Option #1: Home Equity Loan
The most important and beneficial thing about a home equity loan is that it offers a fixed interest rate for predictable monthly payments.
You can take a lump sum out of it to pay for construction costs, and you often have 10 or more years to repay it.
The hold-up for some homeowners is that you’ll need sufficient equity in the home to qualify, and it adds a second mortgage to your property.
Financing Option #2: Home Equity Line of Credit (HELOC)
A home equity line of credit or (HELOC) is a revolving line of credit. You can take what you need and pay it off when you can. During the draw period, you have interest-only payments that can be used for the various ADU expenses you incur over time.
The problem with a HELOC is that the lender may freeze or reduce your line if your property value drops. Plus, the variable interest rate can make your payments unpredictable.
Financing Option #3: Cash-Out Refinance
The cash-out refinance replaces your existing mortgage with a larger one, allowing you to combine ADU financing with your primary mortgage.
The cash-out refinance can lower your monthly mortgage payment if the rates are favorable, but you’ll have closing costs to pay.
A cash-out refinance may not be an option for those with bad credit, as you need a good credit score to qualify.
Financing Option #4: Construction Loan
A construction loan is designed for those property owners who plan to build an ADU from the ground up. The funds are often released in stages that coincide with the construction process. Once the construction is finished, the loan is usually converted into a mortgage.
Most construction loans only require interest-only payments during construction. On the flip side, the approval process for a construction loan is a bit more in-depth and cumbersome simply because it’s not based on equity, and the interest rates are higher than standard mortgages.
Financing Option #5: Renovation Loan
The renovation loan applies to any upgrades or modifications of an existing structure, such as a garage conversion or basement apartment renovation.
The renovation loan is typically rolled into a long-term mortgage as a new loan or by refinancing the existing one.
In some cases, it allows for a lower down payment option but higher closing costs, and the approval process can be long.
Financing Option #6: Personal Loan
The personal loan eliminates the need for home equity, so it’s an excellent option for someone who has recently purchased a home or purchased it when the market was high.
The approval process is shorter, and no collateral is required. However, the downside is the higher interest rates and smaller overall loan amounts than with other financing options.
ADU Loan Qualification Requirements
As we reviewed the different financing options for the ADU, you likely noticed that some were easier to qualify for than others. As with any financing or loan, the more equity you have and the better your credit score and debt-to-income ratio are, the easier it is to qualify.
The table below provides a basic overview of the qualification requirements for the different types of ADU financing.
| Loan Type | Min. Credit Score | Ideal Debt-to-Income (DTI) | Loan-to-Value (LTV) Ratio |
| Home Equity Loan | 620–700+ | < 43% (often 36% ideal) | Up to ~80% of the home’s current value |
| HELOC (Home Equity Line) | 620–700+ | < 43% | Up to ~85% of the home’s current value |
| Cash-Out Refinance | 620–700+ | < 45% | Up to ~80% (sometimes 85%) |
| Construction Loan | 680–720+ | < 43% | Up to 95% of future value (varies) |
| Renovation Loan | 620–700+ | < 43–45% | Typically up to 80–90% of future value |
Note: Loan approval varies by lender, and requirements may shift based on market conditions.
Key Considerations for ADU Loan Qualification
If you are still unsure if you can get a loan for an ADU, here are the most important factors you should consider.
#1: Credit Score
The high credit score opens the door to multiple options for your ADU financing. Lenders prefer a score over 680, but if you want to get the best rates, over 750 is ideal. Some products like personal loans or HELOCs will be available if your credit score is below 680, but this may increase your interest rate.
#2: Debt-to-Income (DTI) Ratio
Your debt-to-income ratio, or DTI, must be under 43% for lenders to consider your ADU financing request. Your monthly debt should not exceed 43% of your gross income. The line items considered in a DTI ratio calculation typically include mortgages, loans, and credit cards.
#3: Loan to Value (LTV)
The loan-to-value (LTV) impacts the amount of money you will qualify for. The LTV determines how much of your home’s value you can borrow against. The more equity you have, the better.
Home equity loans and HELOCs allow borrowing up to 80 to 85% of your home’s current value. The construction and renovation loans look at your home’s future value after ADU completion to determine the borrowing limit.
#4: Your Existing Mortgage
If you already have a mortgage on your primary residence, taking out a home equity loan or HELOC means that you will need to add a second one.
The cash-out refinancing option consolidates everything into a single loan, but it resets your mortgage term and has additional closing costs. Therefore, you’ll have to make sure you can manage the payments of the existing mortgage with any changes you make both during and after the ADU construction process.
Final Thoughts
The initial costs of building an ADU can feel overwhelming regardless of your chosen finance option. The good news is there are ways to offset expenses by turning your property into an income-generating asset.
In states where ADU rentals are permitted, you can rent out the unit for long-term or short-term tenants or use it as storage space during vacancies. Beyond the ADU itself, your property holds additional earning potential to help keep ADU financing costs in check.
Unused driveway space or an unpaved lot can be rented out for vehicle storage to those in need. Platforms like Neighbor make it easy to list your available spaces and connect with renters, helping you generate passive income to help cover construction costs.
