Most ADU projects don't die because the lot is wrong. They die because the financing is wrong.
Here's the complete 2026 map of how to pay for an ADU in San Diego.
The one question that decides everything
Before you shop for a loan, answer this: Will you keep the property long-term (5+ years), or might you sell within three?
If you're keeping it, optimize for lifetime rate and flexibility. If you might sell, optimize for avoiding prepayment penalties and closing costs. That single question rules out half of your options.
HELOC — Home Equity Line of Credit
How it works: A revolving line secured by your home equity. Draw as you need during construction, pay back on a schedule.
Rates (April 2026): Prime + 0.5% to Prime + 2%. Roughly 7.5% to 10% today.
Best for: Homeowners with significant equity (>$200K) who want speed and flexibility.
Watch out for: Variable rates. A HELOC at 8% today could be 10% in 18 months.
Cash-Out Refinance
How it works: Replace your existing mortgage with a larger one, take the difference in cash.
Rates (April 2026): 6.75% to 7.50% on a 30-year fixed, depending on credit and LTV.
Best for: Homeowners whose current mortgage rate is higher than today's, or who want to lock in a single fixed payment.
Watch out for: Giving up a sub-4% pandemic-era rate to cash out is almost always a bad trade, even for an ADU.
Construction-to-Permanent Loan
How it works: A single loan that funds construction in phased draws, then converts to a permanent mortgage when the ADU is complete.
Rates (April 2026): 7.25% to 8.25% on the permanent portion.
Best for: Homeowners without enough equity for a HELOC, and investors building ground-up.
Watch out for: Underwriting looks at projected post-build value. Your appraiser has real power over whether this works.
DSCR Investor Loan
How it works: Debt Service Coverage Ratio loan. Qualifies on the ADU's projected rent — not your W-2 income.
Rates (April 2026): 7.75% to 9.25%.
Best for: Investors without traditional W-2 income, or investors scaling to multiple ADUs.
Watch out for: Prepayment penalties are common (3- or 5-year step-downs). Don't take a DSCR loan if you might sell inside the penalty window.
CalHFA ADU Grant
How it works: A $40,000 grant for predevelopment costs (design, permits, site prep, impact fees) for qualifying low-and-moderate-income homeowners.
Amount: $40,000, non-repayable.
Best for: Owner-occupants with household income under the program's AMI threshold.
Watch out for: The program is oversubscribed. Funding cycles open and close quickly.
Other local San Diego programs
- SD County Innovative Housing Trust Fund — periodic grant cycles for affordable ADU rentals.
- City of San Diego Backyard Homes Program — design and permit-fee waivers for deed-restricted affordable ADUs.
Both come with occupancy or rent restrictions. They work, but read the fine print.
The stack most of our clients use
For a typical $400K ADU with a W-2 homeowner:
- $300K HELOC or Construction-to-Perm for construction
- $40K CalHFA grant if income-qualifying
- $40–60K savings for soft costs and contingency
For an investor:
- $320K DSCR Construction loan
- $80K cash equity
How ADU PALS helps
We introduce every client to three to four vetted lenders during Phase 1 — before you've spent a dollar on design. You'll get actual rate quotes against your actual project, not a rate board average.
Ready to see what pencils for your lot? [Start a free consultation →](/contact)
