ADU Loans: Every Way to Borrow for a Backyard Home
There is no single product called an ADU loan. Lenders fund ADUs with five main loan types, and each one fits a different kind of homeowner. The right one depends on your equity, your current mortgage rate and how big the project is.
- We explain every option, not just one product
- Matched with lenders who finance ADUs
- No obligation to take any offer
How to pick an ADU loan
Start with one split. Some loans are based on the equity you have today: a HELOC, a home equity loan and a cash-out refinance. Others are based on the value of the property once the ADU is finished: construction loans and renovation loans such as Fannie Mae HomeStyle and FHA 203k.
If today's equity covers the whole budget, the equity based loans are usually simpler and faster. If it does not, the finished value loans can reach further, at the cost of more paperwork, an approved builder and inspections during the build.
Then look at your first mortgage. If its rate is worth keeping, choose a loan that leaves it alone. If it is not, a cash-out refinance may be worth pricing.
At a glance
- Equity based: HELOC, home equity loan, cash-out refinance
- Finished value based: construction loan, renovation loan
- Government backed: FHA and VA routes for eligible owners
- What lenders check: credit, income, equity and the project budget
Equity loans versus finished value loans
Pros
- Equity loans close faster with less project paperwork
- Equity loans let you choose any builder
- Finished value loans can borrow beyond today's equity
- Finished value loans pay the builder only for completed work
Cons
- Equity loans are capped by your home's value today
- Equity loans put the whole build on your existing house
- Finished value loans need plans, a budget and an approved builder
- Finished value loans take longer to close
When another loan fits better
If you already know your equity is short, go straight to ADU construction loans. If your equity is strong and you want flexible draws, a HELOC is often the simplest start. If you want to see the payment on a quote you already have, run it through the ADU loan calculator.
ADU construction loans
Paid to your builder in draws as the unit goes up, then converted or refinanced.
HELOC for an ADU
Draw on your equity as builder invoices arrive.
ADU loan calculator
Estimate a payment from the rate, term and amount a lender quoted you.
ADU loan questions
What type of loan is best for ADU?
The best loan is the one that matches your equity and your current mortgage. Strong equity and a good first mortgage rate point to a HELOC or home equity loan. Thin equity points to a construction or renovation loan.
Which is better, a home loan or a construction loan?
An equity based home loan is simpler when your equity covers the build. A construction loan is better when it does not, because it can lend on the finished value. Many owners price both before deciding.
How to get money for ADU?
Most owners borrow against their home, take a construction or renovation loan, or combine savings with one of those. Some state and local programs have also helped with early costs. A lender who finances ADUs can tell you which routes you qualify for.
Talk to a lender who finances ADUs
Tell us about your project, your equity and your timeline. We will connect you with a lender who offers the loan types that fit, so you can compare real terms side by side.
Talk to a specialist: (555) 555-0141
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