ADU Financing in California

I’m Michael DiVita (DRE #01372066 | NMLS #241655), owner of DiVita Home Finance (DRE #01818285 | NMLS #323700) in Tiburon, CA. I’ve been in California mortgage lending since 2000 and founded DiVita Home Finance in 2007. I’m known as a creative mortgage broker: when a bank says no, I find the lender and the loan structure that can say yes. Most ADU financing conversations come down to one question: what’s the rate on your first mortgage? Call (800) 239-1103.

The main ways to finance an ADU in California are a HELOC or home equity loan (keeps your existing first mortgage), a cash-out refinance, a construction or renovation loan based on the after-completion value, or — if you’re buying — a renovation purchase loan that includes the ADU. If you have a low-rate first mortgage, a second lien usually wins; if you have little equity today, after-completion-value financing can make the project possible. Once the ADU is built, permitted and rented, its income can help you qualify for a refinance.

California ADU Rules That Affect Your Budget

State law has made ADUs much easier to build. Key rules from the Government Code, as summarized in the state’s ADU Handbook:

• Permits within 60 days: local agencies must approve or deny a complete ADU application within 60 days.
• No impact fees under 750 sq ft; larger ADUs can be charged fees proportional to the main home.
• Setbacks: no more than 4 feet from side and rear lot lines, and local rules can’t prevent at least an 800 sq ft detached ADU.
• Height: 16 feet for a detached ADU, 18 feet in some locations near transit or on multifamily lots.
• Owner-occupancy: not required for ADUs; required for junior ADUs (the owner must live in the main home or the JADU).
• How many: under the state’s by-right rules, a single-family lot can have a converted ADU (from existing space), a new detached ADU (up to 800 sq ft) and a junior ADU (up to 500 sq ft inside the home).
• Rentals: ADUs created under state by-right rules can’t be rented for 30 days or less.
• Selling an ADU separately: only where the city or county has adopted an ordinance allowing ADUs to be sold as condominiums (AB 1033).
• HOAs can’t prohibit ADUs or JADUs allowed by state law, though reasonable design rules can apply.

SB 9: duplexes and lot splits

SB 9 lets owners in most single-family zones build two primary units on a lot, split a qualifying lot into two (each at least 1,200 sq ft), or both — plus ADUs as allowed under ADU law. Cities can’t impose standards that would prevent units of at least 800 sq ft. Lot-split applicants must sign an affidavit that they intend to live in one of the units for at least three years, and SB 9 doesn’t apply in historic districts, on certain hazardous or protected lands, or where tenants have lived in the last three years. Units must be rented for more than 30 days.

Property taxes

Under Proposition 13, adding an ADU triggers reassessment only of the new construction; your existing base-year value is preserved. See Prop 13 for homeowners.

ADU Financing Options Compared

I offer HELOCs up to 95% combined loan-to-value and home equity loans up to $1 million, plus construction and renovation financing. Details: HELOCs, 95% CLTV HELOCs, construction loans, renovation loans and cash-out refinancing.

HELOC vs. Cash-Out: A Worked Example

Say your home is worth $1.6 million, you owe $500,000 at 3%, and the ADU will cost $250,000.

• Keep the first, add a HELOC: principal and interest on the existing first is about $2,108 a month; interest-only on a $250,000 HELOC at an illustrative 8.5% is about $1,771. Total: about $3,879.
• Cash-out refinance to $750,000 at 7%: about $4,990 a month in principal and interest.

The low-rate first mortgage is worth protecting. More broadly, on a $600,000 balance the difference between a 3% and 7% rate is about $1,460 a month. The math flips if your current rate is already near today’s rates, if you need the after-completion value to borrow enough, or if you want one fixed payment. See HELOC vs. cash-out refinance.

Using ADU Rent to Qualify

Rent from an ADU that doesn’t exist yet generally can’t be used to qualify for a standard loan. Once the ADU is finished, permitted and rented, Fannie Mae, Freddie Mac and FHA allow its income on a one-unit home you live in, capped at 30% of your qualifying income. A common plan: fund the build with a HELOC or construction loan, then refinance once the unit is rented. Full rules: ADU rental income and mortgage qualification.

What About ADU Grants?

CalHFA’s ADU Grant Program, which reimbursed up to $40,000 of predevelopment costs, was fully allocated and closed as of December 28, 2023. CalHFA warns that anyone claiming they can get you an ADU grant now may be running a scam. Check your city or county for any local programs.

Marin County and Bay Area ADUs

Marin and Bay Area homeowners often have enough equity to fund an ADU with a second lien while keeping a low first-mortgage rate. Permitting speed and design review vary by town, and hillside, septic and fire-zone sites can add cost and time. If you’re buying, ask for the permit history of any existing unit — an unpermitted conversion won’t count toward qualifying income and can complicate the appraisal. See Marin mortgages.

Frequently Asked Questions

What’s the best way to finance an ADU in California?

If you have a low-rate first mortgage and enough equity, a HELOC or home equity loan usually costs least because it leaves the first mortgage alone. If you have little equity today, a construction or renovation loan sized on the after-completion value can work. If your current rate is near today’s rates, a cash-out refinance can be simplest.

Can I use the future ADU rent to qualify for the construction financing?

Generally not on standard loans; rent from a unit that isn’t built yet usually can’t be counted. After the ADU is completed and rented, you can use its income on a refinance, subject to a 30% cap on Fannie Mae, Freddie Mac and FHA loans.

Do I need to live on the property to build an ADU?

Not for a regular ADU — state law bars owner-occupancy requirements for ADUs. Junior ADUs do require the owner to live in either the main home or the JADU.

Will building an ADU raise my property taxes?

Only the value of the new construction is added to your assessed value; your existing Prop 13 base is preserved.

Is the CalHFA ADU grant still available?

No. The program was fully allocated and closed as of December 28, 2023.

Can I sell my ADU separately?

Only if your city or county has adopted an ordinance allowing ADUs to be sold separately as condominiums under AB 1033. Otherwise the ADU stays part of the main property.