ADU Financing in California (2026): HELOC, Refinance and Renovation Loans Compared

Most homeowners in Sacramento do not pay for an ADU in cash. They borrow against the house they already own, refinance it, or use a loan that is sized on what the property will be worth once the ADU is built. Each route has different costs and different risks, and the rules about counting the ADU's future rent changed in the last few years. This guide lays out the options as they stand in 2026, with what the lenders' own rulebooks say.

The short answer

• If you have equity: a home equity line of credit (HELOC) or a home equity loan pays for the ADU without touching your first mortgage.
• If you don't have enough equity yet: a renovation loan (Fannie Mae HomeStyle, Freddie Mac CHOICERenovation or FHA 203(k)) lends against the home's value after the ADU is finished.
• Rent from the ADU can help you qualify, but only within limits: Fannie Mae, Freddie Mac and FHA each cap ADU rent at 30% of your qualifying income, and each has its own rules about when it counts.
• There is no state ADU grant open right now. CalHFA's $40,000 ADU grant has been fully allocated since December 2023 (see our grant update).

Option 1: HELOC or home equity loan

Both are second mortgages with their own payment, sitting behind your existing first mortgage. The Consumer Financial Protection Bureau describes the difference this way:

• A home equity loan is a specific amount borrowed against your equity, paid out as a lump sum, with a fixed or adjustable rate.
• A HELOC is an open-end line of credit you can draw on repeatedly. HELOCs usually have a variable rate, so payments can change from month to month.

Why people use them for an ADU: you keep your first mortgage and its rate, and a HELOC lets you draw money as construction milestones come due instead of paying interest on the full amount from day one.

The catch: how much you can borrow depends on the equity you have today, not on the value the ADU will add. And as the CFPB puts it, if you can't repay on schedule, you could lose your home.

Option 2: Cash-out refinance

A cash-out refinance replaces your current mortgage with a larger one and pays you the difference. It makes sense when today's rates are close to or below your current rate. If your existing mortgage carries a low rate from earlier years, refinancing the whole balance to fund the ADU can cost more over the life of the loan than a separate HELOC. One more limit: FHA does not allow ADU rental income to be counted on a cash-out refinance, and Fannie Mae counts it only on purchases and limited cash-out refinances.

Option 3: Renovation loans sized on the finished value

These loans are built for people who have the income but not yet the equity. The lender appraises the home as completed, with the ADU, and lends against that value.

Fannie Mae HomeStyle Renovation

• Accessory units are listed as an acceptable improvement.
• Renovation costs can be up to 75% of the as-completed appraised value on a refinance, or of the lesser of purchase price plus renovation costs and the as-completed value on a purchase.
• It cannot be used to tear down and rebuild the main house.

Freddie Mac CHOICERenovation

• Freddie Mac allows it to build a new ADU or renovate an existing one.
• The same 75% of as-completed value limit applies, and the loan carries a contingency reserve of 15% to 20% of the renovation cost.
• If you already financed an ADU with a short-term loan and the unit is finished, a no cash-out refinance can pay that loan off.

FHA 203(k)

• The standard 203(k) lists adding an ADU attached to the existing house, and renovating an existing attached or detached ADU, as eligible improvements. A new detached ADU is not on that list.
• The Limited 203(k) is capped at $75,000 and covers only minor, nonstructural work, so it does not fit an ADU build.

Renovation loans take more paperwork than a HELOC: the lender reviews the contractor, the plans and the budget, and pays the contractor in draws as work is completed. Building that schedule into the contract from the start avoids delays later.

Option 4: Construction-to-permanent loan

A construction loan funds the build in stages and then converts to a regular mortgage. Fannie Mae's single-closing version covers both phases with one closing and requires a certificate of occupancy before the permanent loan begins. It is more common for building a whole new house than for adding an ADU to one you already own, and lenders vary widely in whether they offer it for ADUs.

Can the ADU's rent help you qualify?

Yes, within limits that differ by program:

Program	When ADU rent can count	Limit
Fannie Mae	One existing ADU on a one-unit home; purchase or limited cash-out refinance only	Up to 30% of total qualifying income; 75% of gross rent is used
Freddie Mac	One-unit primary residence; purchase or no cash-out refinance; full appraisal with rental comparables; never from an unpermitted ADU	Up to 30% of total qualifying income; at most 75% of the lease amount
FHA	One-unit home with an ADU; not on a cash-out refinance; supported by the appraiser's market rent	Up to 30% of total effective income; 75% of the lesser of market rent and the lease

The practical reading: rent from a planned ADU rarely counts at Fannie Mae, which looks for an existing unit, so plan to qualify on your own income and treat the rent as what pays the loan down once the unit is leased. And a permitted ADU matters twice: Freddie Mac will not count rent from an illegal one, and none of these lenders will finance building it without permits.

Loan limits in Sacramento County for 2026

• Conforming (Fannie Mae and Freddie Mac): $832,750 for a one-unit home (FHFA).
• FHA: $764,750 for a one-unit home in Sacramento County (HUD).

A refinance or renovation loan above these amounts is a jumbo loan with its own terms.

Property taxes after the ADU is built

Building an ADU does not reassess your whole property. Under California Revenue and Taxation Code section 71, the assessor sets a new base value only for the newly constructed portion; the rest of the property keeps its existing base value.

How to choose

1. Price the ADU first. You cannot compare loans without a written estimate; our ADU cost guide and garage conversion cost guide show where Sacramento projects start.
2. Check your equity. If your current equity covers the estimate, a HELOC or home equity loan is usually the simplest route and keeps your first mortgage.
3. If equity is short, ask lenders about HomeStyle, CHOICERenovation or a standard 203(k) for an attached ADU, all sized on the as-completed value.
4. Compare total cost, not just rate: refinancing a low-rate first mortgage to fund the ADU can cost more than a higher-rate second loan on the smaller amount.

For monthly payment examples, see our financing page; to have a lender review your numbers, you can send a financing application.

FAQ

What is the best way to finance an ADU in California?

It depends on your equity. With enough equity, a HELOC or home equity loan is usually simplest and leaves your first mortgage alone. Without it, a renovation loan such as Fannie Mae HomeStyle or Freddie Mac CHOICERenovation lends against the home's value after the ADU is finished.

Can I use future ADU rent to qualify for a loan?

Partly, and the rules differ. Fannie Mae counts rent only from an existing ADU; Freddie Mac and FHA can count market rent supported by the appraisal. All three cap ADU rent at 30% of qualifying income.

Does FHA finance ADUs?

The standard FHA 203(k) can fund adding an ADU attached to the existing house or renovating an existing ADU. The Limited 203(k) is capped at $75,000 for minor, nonstructural work.

Is the California ADU grant available in 2026?

No. CalHFA's ADU grant of up to $40,000 has been fully allocated since December 28, 2023, and no new round has been announced.

Will an ADU raise my property taxes?

Only for the new construction: the assessor adds a base value for the ADU, and the rest of your property keeps its existing base value.

Sources: Fannie Mae Selling Guide B5-3.2-01 and B5-3.2-02 (HomeStyle Renovation), B3-3.8-02 (rental income from the subject property, including ADUs), B2-3-04 (ADU eligibility), B5-3.1-02 (single-closing construction-to-permanent); Freddie Mac ADU Fact Sheet (February 2026) and CHOICERenovation Fact Sheet; HUD Handbook 4000.1 (203(k) and ADU rental income), Mortgagee Letters 2023-17 and 2024-13; FHFA 2026 conforming loan limits; HUD 2026 FHA mortgage limits for Sacramento County; Consumer Financial Protection Bureau, home equity loans and HELOCs; CalHFA ADU Grant Program status notice; California Revenue and Taxation Code 71 and Board of Equalization guidance on new construction. This is general information, not lending advice; terms vary by lender. Checked October 2026.