Paying for an ADU

Most ADUs are paid for with the equity in the main house. The question is which loan turns that equity into cash at the right time, and whether the ADU’s future rent can help you qualify. This guide compares the common options. It is general information, not lending advice: rates, terms and eligibility depend on the lender and on you.

The four common ways to pay

A home equity loan (a lump-sum second mortgage) sits between a HELOC and a refinance: a fixed amount, usually at a fixed rate, without touching your first mortgage. A construction loan from a local bank or credit union is another route, especially for larger projects.

HELOC: the most common choice

A home equity line of credit lets you borrow against your home up to a limit, draw what you need, and pay interest only on what you have drawn. That suits a project paid in stages. The catch is the limit: it is based on your home’s value today, without the ADU, so on a house with little equity it may not cover the build.

Renovation loans: borrowing against the finished value

Renovation mortgages size the loan on the home’s value once the work is done, which is what makes them useful for ADUs. Two widely used programs:

• Fannie Mae HomeStyle Renovation: a conventional mortgage (purchase or refinance) that includes the cost of the work. Fannie Mae expanded its ADU rules in 2025.
• FHA 203(k): an FHA-insured purchase or refinance with the renovation built in. The Standard 203(k) covers larger projects such as adding a unit.

Both require a written bid and plans, and the money goes out in draws as work is inspected, not as a lump sum to you.

Can the ADU’s rent help you qualify?

Increasingly, yes, with limits:

• FHA (since October 2023): lenders may count 75% of the estimated rent from an existing ADU. For a new ADU added through the Standard 203(k) program, they may count 50% of the projected rent.
• Fannie Mae (since late 2025): rental income from an ADU on a one-unit principal residence can count toward qualifying income for purchases and limited cash-out refinances. Fannie Mae’s underwriting system checks that the ADU income used does not exceed 30% of the borrower’s total qualifying income.

The appraiser documents the ADU and its market rent, so a rent estimate supported by comparable units matters. Ask any lender you talk to how they apply these rules; practice varies.

How money moves during construction

Whatever the source, a project is paid in stages tied to progress: a deposit, then payments at milestones such as foundation, framing, dry-in, rough-ins and completion. With a renovation or construction loan, each draw is released after an inspection confirms the work. Two practical points:

• Design and permit costs come first. Survey, design, engineering and permit fees are usually paid before any loan funds construction. Plan for them from savings or a HELOC.
• Keep a contingency. Site conditions you cannot see, such as a failing side sewer or poor soil, are the usual reason a budget moves.

Costs that are easy to forget

• The King County sewer capacity charge for new connections: about $46 a month for 15 years for an ADU connected from 2026 (Utilities and connections).
• Higher property tax once the assessor values the new unit.
• Insurance for a second dwelling, and landlord coverage if you rent it.
• Appraisal and loan fees.

Start with a realistic project number: our ADU cost calculator gives a planning range by city, type and size, and lenders will want a contractor’s bid that matches it.