How to Get a Loan to Build an ADU

ADU financing refers to any loan product used to fund the design, permitting, and construction of an accessory dwelling unit, or ADU. ADUs are secondary living spaces on a residential property, such as a detached backyard cottage, a converted garage, or an attached in-law suite.

There are three main ways to finance an ADU:

1. Unsecured personal loans (no collateral required)
2. Equity-based products that draw on your home's existing value
3. Renovation or construction loans underwritten to the property's projected value once the ADU is complete

The average range for building an ADU is $40,000 to $360,000, but the total cost depends on size, location, construction type, and other factors. Since ADU financing can affect your monthly cash flow, equity risk, and overall project cost, it’s important to understand the pros and cons of each option.

Not every ADU loan works for every project. Some options draw on your home's equity, others require no collateral, and a few are designed specifically for new construction.

Here's an overview of your options. 

1. Unsecured personal loan

An unsecured personal loan provides a fixed lump sum with no collateral required, meaning your home isn’t on the line. 

Because there's no collateral involved, qualification is based on your credit profile, income, and debt-to-income ratio rather than your home's equity. That also means the application process is often faster and less documentation-heavy than equity-based products.

The trade-off is that interest rates are often higher, ranging from 6% to 36%, depending on where you qualify. That said, for borrowers who want to preserve their home equity or avoid replacing a low existing mortgage rate, it may be worth it.

For home renovations specifically, the high loan amounts available through some lenders make this an appealing option. For example, BHG Financial offers access to high limit personal loans for home renovations up to $250,000,¹ with terms up to 10 years.^1,2 Extended terms help keep monthly payments low—an indisputable benefit for homeowners who want to protect cash flow.

Large loan requirements above $100,000 usually require a score of 700 or higher. The maximum personal loan amount you qualify for is based on your overall financial profile, but lenders like BHG will consider higher DTIs when income and financial history support it.

2. Home equity line of credit (HELOC)

A HELOC is a revolving credit line secured by your home's equity, similar in structure to a credit card with a draw period followed by a repayment period.

During the draw period, which is generally 10 years, you borrow what you need, when you need it, and pay interest only on the outstanding balance. Repayment of principal begins when the draw period closes.

HELOCs are best for phased ADU builds where costs arrive in stages, and you want flexibility to draw funds incrementally. If you're weighing HELOC versus personal loan options for an ADU project, the right choice often comes down to how much equity you have and whether you want fixed payments or a revolving line.

Most lenders cap combined loan-to-value ratio (CLTV) at around 85%, and rates are typically variable, meaning your payment can shift as market rates change. Lenders can also reduce or suspend your credit line if your home's value drops significantly, which could limit your access to funds mid-project.

3. Home equity loan

A home equity loan delivers a fixed lump sum at a fixed interest rate, repaid in equal monthly installments over a set term (often five to 30 years). Unlike a HELOC, the rate and payment don't change, which simplifies budgeting.

Home equity loans are ideal for borrowers who know their total ADU cost upfront and desire payment predictability. With this form of financing, if construction costs exceed your initial estimate, you'll need a separate source of funds to cover the gap.

Typical eligibility requirements include:

• Credit score: 620 or higher
• DTI: Typically 50% or lower
• Remaining equity: At least 15%–20% after the loan closes

Your home serves as collateral with this type of loan, which is one of the major disadvantages of home equity loans. If that’s a concern, other financing paths may be a better fit.

4. Cash-out refinance

A cash-out refinance replaces your existing first mortgage with a new, larger mortgage and pays the difference in cash. If your home has appreciated significantly, this can unlock a substantial lump sum.

To qualify, you'll generally need at least 20% equity, and most lenders will let you borrow against up to 80% of your home's value. Factor in closing costs, which generally fall between 2% and 6% of the loan amount, and a longer timeline for funding—roughly 30 to 45 days.

This option is well-suited for homeowners with strong credit and a current mortgage rate that isn't significantly higher than today's rates.

Refinancing resets your mortgage term and, if current rates are higher than your existing rate, increases your long-term interest cost. Run the numbers carefully before trading a low-rate first mortgage for a higher one.

5. Construction-to-permanent loan

A construction-to-permanent loan funds the build in stages—called draws—as work is completed and inspected, then converts to a standard mortgage once construction wraps up.

Some conventional loan programs explicitly support new construction that includes an ADU, so it's worth confirming with your lender whether your project qualifies.

This type of loan works well for ground-up ADU builds on properties without an existing structure, or new construction where the ADU is part of the original build.

Qualification is also notably more involved than a standard mortgage. Lenders typically require a credit score of 680 or higher, detailed construction plans, a purchase contract, an appraisal, and a vetted builder. If you're adding an ADU to an existing home rather than building new, renovation loans are usually a simpler path.

When an unsecured personal loan makes sense

Speed and flexibility are the defining advantages of an unsecured personal loan. It's also the right tool when you want to avoid touching your home equity or when your existing mortgage rate is low enough that refinancing doesn't make financial sense.

Repayment predictability can also help keep your finances easy to manage during a renovation.

When a HELOC or home equity loan makes sense

If you've built meaningful equity in your home—typically enough to keep your CLTV at or below 80% to 85% after borrowing—a home equity product is often the most cost-effective path.

A HELOC suits phased projects where costs arrive in stages, while a home equity loan works better when you have a firm budget and want a fixed monthly payment from the start.

Both options preserve your existing first-mortgage rate, which matters if you locked in a low rate in prior years.

When a cash-out refinance makes sense

A cash-out refinance is worth considering when your current mortgage rate is close to or above today's prevailing rates, your home has appreciated substantially, and you want to consolidate everything into one payment.

It's less attractive when refinancing would meaningfully increase your rate on a large existing balance—the interest cost over time can outweigh the convenience.

When a construction-to-permanent loan makes sense

If you're building a new primary residence that will include an ADU from the ground up, a construction-to-permanent loan is purpose-built for that scenario. It's less practical for adding an ADU to an existing home, where renovation loans are usually the better fit.

Beyond the upfront cost, an ADU can strengthen your financial position in several ways. Here's what to consider as you evaluate whether the investment makes sense.

Support multigenerational living

Many Americans in their peak earning years are part of the sandwich generation, balancing care for aging parents while still helping adult children establish themselves. An ADU can make multigenerational living more practical by creating a private, on‑site space for family members without forcing a move or shared living arrangements.

Financing an ADU allows homeowners to meet these responsibilities while preserving cash flow and long‑term financial stability.

Create rental income

A permitted ADU can generate monthly rental income without requiring a separate property purchase. Keep in mind that rental income potential varies by location, unit size, and local market conditions, so it's worth verifying realistic rent ranges with a local appraiser or property manager before breaking ground.

Lenders also treat projected ADU rental income differently depending on the loan program, so confirm eligibility with your lender before counting on it for qualification.

Increase property utility and potential value

An ADU adds usable square footage and a separate living unit to your property, both of which can improve appraised value.

The actual value increase depends on local comparable sales, buyer demand for ADU-equipped properties, and the quality of the build. An as-completed appraisal will give you the most accurate picture of projected value improvement before you commit to a loan.

Preserve cash and liquidity

Financing an ADU rather than paying cash preserves your liquid reserves for emergencies, investment opportunities, or operating expenses.

Fixed-rate loan products provide predictable monthly payments that simplify cash flow planning, whether you go with a personal loan, home equity loan, or renovation mortgage. For borrowers deciding between loans or savings, preserving liquidity can be a major reason to finance an ADU rather than pay entirely out of pocket.

Maintain your existing first-mortgage rate

If your current mortgage carries a rate significantly below today's market, a cash-out refinance would replace that rate with a higher one across your entire remaining balance.

Second-lien products like HELOCs and home equity loans, as well as unsecured personal loans, leave your first mortgage untouched. For many homeowners, this consideration alone determines which financing path makes the most sense.

If you want to finance your ADU without putting your home on the line, BHG Financial offers access to some of the highest loan amounts and longest personal loan terms on the market. Through BHG, you can get unsecured personal loans up to $250,000¹ with fixed rates and extended terms up to 10 years.^1,2

There's no collateral required and no prepayment penalty if you want to pay off the balance early.

BHG is built for six-figure professionals and business owners with complex financial profiles, whether you're funding the full build or combining your ADU project with other objectives, such as debt consolidation. Approval decisions come in as little as 24 hours, with funding in as few as five days.³

Check your loan options today, with no impact to your credit score.⁴