Financing — Renovation loan
Renovation loans: one mortgage for your home plus the ADU.
FHA 203(k) and Fannie Mae HomeStyle Renovation loans roll your existing mortgage and ADU construction cost into a single mortgage at standard mortgage rates. They beat HELOCs on rate, often require less equity, and explicitly allow ADU construction — but they come with stricter contractor and paperwork requirements.
How it works
A first-mortgage product that finances your home purchase or refinance plus renovation costs in one loan. FHA 203(k) is government-insured and works with lower credit scores and down payments; Fannie Mae HomeStyle is a conventional product with more flexibility on scope. Both products explicitly allow ADU construction as eligible renovation.
- Rate range
- Roughly 7–9.5% in mid-2025/2026 conditions (close to standard mortgage rates) — lower than HELOC and construction-loan rates
- Loan amount
- FHA 203(k): up to FHA conforming limit ($524,225 baseline, higher in high-cost CA counties). HomeStyle: up to conventional conforming limit (in CA, often $1,089,300+ for high-balance counties).
- Term
- 15 or 30 years
- Best for
- Homebuyers planning to build an ADU at purchase, or homeowners without enough equity for a HELOC. Particularly strong when refinancing and adding an ADU in one transaction.
Application process
- 01Apply during Phase 2 or Phase 3 — these loans need detailed plans and contractor bids before approval
- 02Provide standard mortgage documentation plus full construction plans, contractor bid, and a builder's qualifications package
- 03Lender orders an as-completed appraisal projecting the property's value after the ADU is built
- 04203(k) requires a HUD consultant on jobs over $35,000 (most ADUs); HomeStyle does not require a consultant but requires lender-approved contractor
- 05Funds release in draws after lender-coordinated inspections during construction
Pros
- Lower rate than HELOC or construction loan — close to standard mortgage rates
- Lower down payment / equity requirements than other ADU products (especially 203(k))
- Combines purchase or refi with construction — one closing, one payment
- Fannie Mae and Freddie Mac allow projected ADU rental income to count in qualification
Cons
- More paperwork than HELOC or cash-out refi — particularly 203(k)
- Stricter contractor requirements; both products require contractor pre-qualification
- Longer underwriting (60–90 days typical)
- 203(k) has loan size limits that can be tight in high-cost CA markets
Run the numbers on your specific loan
Use the loan calculator to compare HELOC, refi, construction, and renovation loans side by side with current rates.
Alternatives and related
FAQ
- Does an FHA 203(k) loan really allow ADU construction?
- Yes. FHA explicitly allows accessory dwelling unit construction as an eligible renovation under 203(k) Standard. The HUD consultant must approve the scope, and the contractor must be on the FHA-approved list, but ADU construction is squarely within the program.
- Can I use HomeStyle to refinance into a new mortgage and fund the ADU?
- Yes — Fannie Mae HomeStyle Renovation explicitly supports refinance + renovation in a single transaction. This is one of the cleanest ways to fund an ADU when your current mortgage rate is high; the rate on the new HomeStyle loan typically beats both HELOC and construction-loan rates.
- What contractor qualifications do these loans require?
- Both products require lender-approved contractors with valid licensing, insurance, and (for 203(k)) a HUD-acceptable contractor application. Some lenders maintain pre-approved contractor lists; if your builder isn't on the list, they'll need to submit credentials, which can take 2–4 weeks.
Get sourced ADU updates monthly
We re-validate rate ranges and grant status each quarter.