Thinking about adding an ADU to your Los Angeles property but unsure how to pay for it? You are not alone. Many LA homeowners want the extra income and flexibility an ADU brings, yet the financing choices can feel overwhelming. This guide breaks down your loan options, expected costs, taxes, and timelines so you can plan with confidence. Let’s dive in.

ADU financing basics in Los Angeles

Los Angeles follows California’s ADU laws, which aim to reduce local barriers. That includes limits on certain impact fees for smaller units and clear timelines for permit review. You can review statewide rules on the state’s ADU page at the Department of Housing and Community Development. California’s ADU law overview explains what cities must allow and how fees work.

The City of Los Angeles offers tools to help you move faster. The city ADU portal highlights local requirements, fee guidance, and programs like the ADU Accelerator. You can also save time and design costs by choosing pre‑approved standard plans through YOU‑ADU. Learn more at the City of Los Angeles ADU portal and LADBS YOU‑ADU pre‑approved plans.

Your main financing options

Construction‑to‑permanent loans

These single‑close loans fund your build, then convert to a regular mortgage after completion. Payments are often interest only during construction. Many lenders underwrite based on your plans, budget, and the after‑improved value of your property.

• Pros: One closing, predictable long‑term rate, supports larger builds.
• Cons: More documentation and inspections. You need a lender and contractor experienced with draws and LA permitting.

Renovation mortgages: FHA 203(k) and HomeStyle

FHA and Fannie Mae both offer renovation products that wrap construction costs into one mortgage.

• FHA 203(k): Can finance ADU construction for owner‑occupied homes, with program limits and rules. See FHA 203(k) program details.

• Fannie Mae HomeStyle Renovation: Can finance ADU work as part of a purchase or refinance. See Fannie Mae HomeStyle Renovation.

• Pros: Often lower rates than unsecured loans. One payment tied to your primary mortgage.

• Cons: Requires lenders who know these programs. FHA applies only to owner‑occupied primary residences.

Home equity: HELOC, home equity loan, or cash‑out refinance

If you have equity, a HELOC, home equity loan, or cash‑out refi can fund an ADU. These can close faster than construction loans but use your home as collateral. HELOCs have variable rates. Home equity loans have fixed rates. Cash‑out refis replace your first mortgage.

Specialty ADU and second‑mortgage lenders

Some private lenders offer ADU‑specific construction loans or second mortgages. These can bridge gaps if traditional routes do not fit. Terms vary, so compare interest rate, fees, and draw process carefully.

Equity‑sharing alternatives

Home equity investment companies or private partners can fund construction in exchange for a share of future value. There are no monthly payments, but you share upside. These contracts are complex, so review terms closely.

Grants and subsidized loans

California has offered statewide support through the CalHFA ADU Grant program. In past rounds, the grant covered up to 40,000 dollars for pre‑development and closing costs. Availability changes, and funds can go fast, so check the CalHFA ADU Grant page for current status. Some nearby cities have run pilot loan programs tied to affordability covenants. Always review eligibility and timelines before you count on the funds.

How lenders underwrite ADUs

Using projected ADU rent to qualify

FHA now lets lenders include a portion of ADU rent in your qualifying income. Many owners see a meaningful boost in borrowing power.

• FHA policy: Up to 75 percent of rent can count for existing ADUs, and a portion can count for new ADUs under 203(k) rules. See HUD’s update on ADU rental income treatment.
• Fannie Mae: Lenders may consider ADUs under product rules and will underwrite to after‑improved value. See Fannie Mae’s ADU and renovation guidance.

Appraisal and after‑improved value

For construction and renovation loans, the appraiser estimates your home’s value after the ADU is complete. That number drives your maximum loan‑to‑value.

Typical LTV ranges and documentation

Depending on the product and your profile, lenders may finance a large share of the after‑improved value. Expect detailed plans, a signed contractor agreement, a draw schedule, permits, and lender inspections.

Permits and draw schedules

Lenders want permitted projects. Using LA’s pre‑approved plans can reduce uncertainty and help keep draws on schedule.

What it costs in LA

Build cost ranges

Costs vary by ADU type and site. Recent LA estimates show:

• Garage or interior conversion: roughly 80,000 to 200,000 dollars depending on scope.
• Detached ADU: commonly 150,000 to 400,000 dollars or more, with many projects in the 200,000 to 350,000 dollar range. Per‑square‑foot estimates often run 250 to 450 dollars depending on finishes and site work. See the LA cost overview from LA DU.

Plan for a 10 to 20 percent contingency for utilities, site conditions, and changes.

Permit fees and utilities

City fees depend on size and scope. State law limits certain impact fees for ADUs under 750 square feet. Utility upgrades such as electrical service or sewer laterals can add to your budget. Review the city’s guidance on the LA ADU portal.

Property taxes and insurance

Once complete, the county will add the ADU’s contributory value to your assessed value, which increases your property taxes. You may also receive a one‑time supplemental tax bill after completion. Learn more from the Los Angeles County supplemental tax page.

If you plan to rent the unit, talk to your insurance agent before you build. You may need a landlord endorsement or a separate policy to cover rental activity.

Timeline and carrying costs

Plan for several months from permit to break ground, then more months for construction. Delays with utilities, plan check corrections, or contractor availability can extend your interest‑only period. Build extra time and interest cost into your budget.

Smart planning steps

• Get clear on your ADU type. Gather at least two or three contractor bids and compare apples to apples.
• Talk with your current lender about a cash‑out refi, HELOC, or a construction or renovation mortgage. Confirm timelines and draw process.
• If using FHA 203(k) or HomeStyle, choose a lender who regularly closes those loans for ADUs.
• Check the CalHFA ADU Grant page for current availability and participating lenders.
• Consider LA’s YOU‑ADU pre‑approved plans to simplify plan check.
• Map out tax and compliance. Review rental income rules in IRS Publication 527 and Los Angeles short‑term rental requirements on the LA ADU portal. Consult your tax and insurance pros before you start.

Common pitfalls to avoid

• Underestimating total cost. Utility upgrades, site work, and finish choices add up. Build a healthy contingency.
• Counting on a grant that is not yet secured. Programs can close or change quickly.
• Starting without permits. Unpermitted work can block financing, insurance, and rental plans.
• Choosing a lender unfamiliar with LA ADUs. Inexperience can slow draws and add cost.

Will an ADU help when you sell?

An ADU can add flexibility and potential rental income that many buyers value. The exact value impact varies by location, design, and rental potential. A local appraisal and market analysis will give you the clearest picture. For context on how value is assessed, see this plain‑English overview of ADU valuation factors from the Los Angeles Times.

If you are building with resale in mind, focus on permits, quality construction, and a layout that photographs and shows well. That makes it easier to market and justify value when you are ready to sell.

Ready to map out your ADU strategy and how it fits your long‑term property goals? Reach out to Gina Mancuso for a practical, numbers‑first conversation about timing, resale positioning, and next steps.

FAQs

What is the best loan type for financing an ADU in Los Angeles?

• The most affordable option depends on your equity, credit, timeline, and project size. Compare a HELOC or cash‑out refi with a renovation or construction‑to‑permanent loan to see total cost over your expected timeline.

Can I use projected ADU rent to qualify for a mortgage in Los Angeles?

• Often yes. FHA now allows a portion of ADU rent to count toward qualifying income, and many lenders follow product rules that consider ADUs. See HUD’s ADU income policy update.

Are there grants or low‑interest loans for ADUs in Los Angeles?

• The state’s CalHFA ADU Grant has helped with pre‑development costs in prior rounds. Availability changes, so check the CalHFA ADU Grant page and confirm details with a participating lender.

How much will my Los Angeles County property taxes increase after I add an ADU?

• The County Assessor adds the ADU’s contributory value to your assessment, and you may get a one‑time supplemental bill. See the county’s supplemental tax guidance and consult your tax pro for a parcel‑specific estimate.

What tax and insurance steps should I take before renting my ADU in Los Angeles?

• Review rental reporting and deductions in IRS Publication 527 and talk with your insurer about any landlord endorsements or coverage updates required for a rented unit.