Construction Loans Explained: How to Finance an ADU or a Ground-Up Build
Building is exciting. Paying for it is where many projects stall. This guide explains the main ways to fund an ADU or a new build, in plain words, so you walk into a lender meeting with confidence.
- There are several ways to fund a build, and the best one depends on your equity and plan
- Construction loans pay out in stages, not all at once
- Always budget a cushion for surprises
How a construction loan works
A construction loan pays your builder in stages, called draws, as work is finished and inspected. During construction you usually pay interest only on what has been drawn. After the build, the loan is paid off or turns into a regular mortgage.
The main options
- Construction-to-permanent: one loan that covers the build and then becomes your mortgage. One closing, one set of costs.
- Construction-only: a short loan for the build, followed by a separate mortgage or payoff. Two closings.
- Renovation loans: programs such as the FHA 203(k) and Fannie Mae HomeStyle roll the purchase or refinance and the work into one loan.
- Home equity line of credit (HELOC) or home equity loan: borrow against equity you already have. Often the simplest for an ADU if you have enough equity.
- Cash-out refinance: replace your mortgage with a larger one and take the difference in cash. Compare it against the rate on your current loan.
- ADU-specific loans: some lenders offer products that consider the value of the property after the ADU is built.
What lenders usually want
Expect to show plans, a detailed budget, a licensed contractor, and permits. Ground-up construction loans often ask for a larger down payment or more equity than a regular mortgage. Credit and income still matter.
Protect yourself
- Add a contingency of 10 to 15 percent to your budget
- Get bids from more than one licensed contractor
- Understand the draw schedule and who inspects each stage
- Know what happens if the project runs over time or over budget
Take the quiz
The quiz below points you to the path that usually fits your situation. Then talk with a lender who does construction lending, and bring us in early. We help you plan the project so the numbers hold up. See ADU consulting and the ADU payoff guide.
Let's make your move simple.
Free first conversation. No pressure. Just a clear plan.
Common questions
What is the difference between a construction loan and a renovation loan?
A construction loan funds building something new or a major build in stages. A renovation loan rolls the purchase or refinance and the improvements into one mortgage. Which one fits depends on the project.
How much do I need to put down on a construction loan?
It varies by lender and loan type. Ground-up construction loans often require more down payment or equity than a standard mortgage.
Can I use a HELOC to build an ADU?
Many owners do, if they have enough equity. HELOC rates are often variable, and your home is the collateral, so compare the risks.