Building an ADU—whether it’s a backyard unit, garage conversion, or detached cottage—can be an affordable way to add space or generate rental income.

Best Loan Options:

• Home Equity Loan or HELOC: If you have existing equity in your home, this can be a cost-effective way to fund construction with flexible repayment.

• Cash-Out Refinance: Refinancing your mortgage at a favorable rate allows you to pull out cash for the ADU build.

• Specialty ADU Loans: Some lenders and municipalities now offer ADU-specific financing programs to encourage housing development.

Tip: If your ADU is intended as a rental, explore whether projected rental income can be factored into the loan approval.

A large-scale remodel—such as opening up a floor plan, adding a second story, or upgrading major systems—often requires more funding than savings alone can cover.

Best Loan Options:

• Home Renovation Loan: Lenders like Fannie Mae’s HomeStyle® or FHA’s 203(k) programs combine your current mortgage and renovation costs into one loan.

• Home Equity Loan/HELOC: Great if you want to keep your existing mortgage rate but borrow against your equity for remodel funds.

• Personal Construction Loan: For shorter-term financing when equity options aren’t available, though usually at higher interest rates.

Tip: Renovation loans are particularly helpful when you want both construction funds and a long-term fixed mortgage in one package.

For Personal Ownership (Building Your Own Home)

When building a custom home for yourself, you’ll want financing that bridges the construction period and long-term ownership.

• Best Loan Options:

  • Construction-to-Permanent Loan: Starts as a construction loan covering build costs, then automatically converts into a permanent mortgage once the home is complete.

  • Lot + Construction Loan: If you’re also purchasing land, many lenders bundle lot financing with the construction loan.

Tip: These loans typically require detailed plans, a budget, and a licensed builder—be prepared with documentation before applying.

For Investment Properties (Spec Builds or Rentals)

Building for investment has different requirements—lenders are more focused on project viability and your track record.

• Best Loan Options:

  • Hard Money Loan: Short-term, asset-based financing often used by developers for flips or spec homes. Higher interest but faster approval.

  • Commercial Construction Loan: For larger-scale projects or multi-unit builds, structured more like business loans with draw schedules.

  • Bridge Loan: Temporary financing to cover costs until the property is sold or refinanced into a long-term loan.

Tip: Investors should run detailed pro forma financials before applying, since lenders weigh profitability and exit strategies heavily.