Accessory Dwelling Units (ADUs)—backyard cottages, garage conversions, and in-law suites—are one of the fastest ways to add living space, monthly income, and long-term value. In 2025, evolving rules and broader financing choices make ADUs more attainable than ever. See Fannie Mae regarding buying a home with an existing ADU.
What has changed lately?
• Local ADU sales (AB 1033): California now allows cities to opt in to sell ADUs as separate condo units. San José has already implemented this policy, and San Diego is following suit. Check your city’s status before planning a sale strategy. Read more at CapRadio
Using ADU income to qualify:
• Conventional: Fannie Mae and Freddie Mac allow ADU rental income in specific cases (e.g., Fannie’s HomeReady®). Requirements vary by occupancy and documentation—your scenario matters. See Fannie’s HomeReady® ADU
rental income in specific cases.
• FHA: As of recent updates, lenders can use a portion of projected ADU rent to help you qualify, with caps (e.g., rental income generally limited to 30% of total effective income, and not eligible for cash-out refis). See PennyMac Correspondent Group for more information.
Heads up on timelines: Even with streamlined permitting, utility work can slow projects—particularly electric service upgrades in some parts of California. Build a cushion into your schedule. See the San Francisco Chronicle for more information.
Popular ways to finance an ADU
• HELOC (tap equity as you go): Revolving line—great for phased work or contingency buffers.
• Cash-Out Refinance (one new loan): Simplify payments; consider breakeven and long-term rate outlook.
• Renovation/Construction Loans (build + finance in one): Useful for ground-up ADUs or major conversions.
• Purchase + ADU Plan: Buy a property suited for an ADU and finance improvements after closing.
• Investor scenarios (DSCR): For investment properties where rental cash flow drives approval, explore DSCR options and local ADU rules.
ADU ROI in real life
Monthly offset: ADU rent can help cover mortgage and ownership costs when allowed by the program and documentation. See Fannie Mae
Resale flexibility: In opt-in cities under AB 1033, selling an ADU as a condo may be possible once local rules are in place—plan with your agent and attorney. Read more at CapRadio
Your 6-step ADU plan
• Feasibility: Zoning, setbacks, size, parking, and utility capacity.
• Budget: Hard costs, soft costs (design/permits), and contingencies.
• Finance fit: HELOC vs. cash-out vs. construction—run scenarios with a loan advisor.
• Design + Builder: Factory-built or site-built; energy/code compliance.
• Permits + Utilities: Submit early; coordinate power, water, sewer. Read more San Francisco Chronicle
• Lease-up: If renting, get a rent schedule (1007/1000) to support income where allowed. Find out more at Mortgage Research Network
FAQs
Can I sell my ADU separately?
Possibly—only where your city/county has adopted AB 1033 rules (e.g., San José). Check local implementation and condo-mapping requirements. Read more at CapRadio.
Can ADU rent help me qualify?
Often, yes—Fannie Mae/Freddie Mac permit ADU income in defined cases; FHA also allows a portion of projected rent, subject to limits and documentation. We’ll map your program to your documentation. Find out more at Fannie Mae.
Are there program-specific restrictions?
Yes. Example: Fannie Mae, in many cases, does not allow ADU income on 2–4 unit properties; however, HomeReady® is an exception in specific scenarios. We’ll look at your occupancy, property type, and AUS findings. See Fannie Mae Selling Guide.
CTA:
Ready to run numbers for your ADU? Apply with New Wide Lending Program availability and terms subject to lender approval.