The CalHFA $40,000 ADU grant is closed and has been since late 2023, and the state warns that anyone offering to get it for you is running a scam. What does exist in 2026: HELOCs and cash-out refinances, renovation loans, construction-to-permanent loans, and city programmes in Pasadena and Long Beach. Fannie Mae, Freddie Mac and FHA now all let projected ADU rental income help you qualify, capped at 30 percent of total qualifying income, and none of them allow it on a cash-out refinance.
- CalHFA $40k grant
- Closed since 2023State warns offers are scams
- ADU rental income
- Usable to qualifyCapped at 30% of total income
- Not on cash-out refi
- All three agenciesFannie, Freddie and FHA
- Best local programme
- PasadenaUp to $225,000 at 1%
- Start here: the grant everyone asks about is gone
- The rental income rule, and the part that trips people up
- Freddie Mac's appraisal requirements are the real obstacle
- What actually finances an ADU build
- City programmes that exist right now
- Two cost reducers that work like funding
- Can you sell the ADU separately to recover the cost
Work out your own number. The adu cost calculator gives you a line-item range for your project in under a minute.
Start here: the grant everyone asks about is gone
The CalHFA ADU Grant Program offered up to $40,000 toward pre-development and closing costs, never construction. Its page has carried a single notice since December 2023 saying the latest round of funding has been fully allocated. It has not reopened, no reopening is announced, and a new round would need a new appropriation.
CalHFA goes further on that same page: anyone claiming they can help you get an ADU grant is running a financial scam. A great deal of ADU marketing still implies the money is available. If someone offers to secure it for you, that is the end of the conversation.
The rental income rule, and the part that trips people up
This is the genuinely useful change of the last two years. All three major loan channels now let projected ADU rental income count toward qualifying.
- Fannie Mae allows ADU rental income on a one-unit principal residence, for purchase or limited cash-out refinance only, capped at 30 percent of total qualifying income, from one ADU only
- Freddie Mac allows it on a one-unit primary residence or investment property, with two caps that stack: lease-documented income capped at 75 percent of the lease amount, and qualifying ADU income capped at 30 percent of total income
- FHA counts 75 percent of the lesser of market or lease rent on an existing ADU, but only 50 percent under a 203(k) rehabilitation loan, which is the one that applies when you are building the ADU. Same 30 percent overall cap
The rule nobody mentions: none of the three allow ADU rental income on a cash-out refinance. If your plan was to take cash out against projected ADU rent, that specific route does not work with any of them.
Freddie Mac's appraisal requirements are the real obstacle
On paper Freddie's programme is generous. In practice the appraisal requirements are strict and in some neighbourhoods they are the binding constraint.
A full appraisal is required, automated collateral evaluation is not acceptable, the sales comparison approach must include at least one comparable sale with an ADU, and the rental analysis must include at least three comparable rentals with at least one that includes a rented ADU.
In an area where few permitted ADUs have sold or rented, finding those comparables is genuinely difficult. Ask your lender about this early rather than discovering it at underwriting. Landlord education is also required for purchases unless you have at least a year of rental management experience.
What actually finances an ADU build
| Product | Good for | Watch out for |
|---|---|---|
| HELOC or home equity loan | Owners with substantial equity | Equity is the binding constraint; variable rates |
| Cash-out refinance | Owners with equity and a low-rate loan to give up | ADU rental income cannot be used to qualify |
| FHA 203(k) | Buyers and owners with less equity | Only 50 percent of rent counts on the rehab product |
| Fannie Mae HomeStyle Renovation | Financing the build inside one first mortgage | Draw administration and contractor requirements |
| Freddie Mac CHOICERenovation | Same, plus refinancing short-term build debt | Appraisal comparable requirements |
| Construction-to-permanent | Ground-up detached units needing draws | Confirm current agency terms with your lender |
We work with clients on all of these and have no financial relationship with any lender. We deliberately name no specific lenders or rates on this page, because those change constantly and a stale recommendation is worse than none.
City programmes that exist right now
Pasadena runs the strongest programme in the region. Its Second Unit ADU Program offers loans up to $225,000 at 1 percent simple interest with no payments for the first three years. The completed ADU must be leased to a Pasadena Housing Choice Voucher tenant for seven years, with priority to homeowners below 80 percent of area median income. The round announced in January 2026 supports up to 25 ADUs.
Long Beach runs Backyard Builders, offering up to $250,000 at 2 percent over 30 years with payments deferred for the life of the loan, meaning most participants pay nothing unless the property is sold or transferred. The second round funds at least 16 ADUs. Rentals must be 30 days minimum and renting to voucher holders is encouraged but not required, which is notably less restrictive than Pasadena. Oversubscription is handled by lottery.
Both programmes have application windows rather than continuous intake, and our information on both is some months old. Confirm the current round directly with the city before planning around either.
The City of Los Angeles publishes no ADU construction financing programme. Its ADU Accelerator Program, which placed tenants into existing permitted ADUs rather than funding construction, shows as closed on the city's own page. We found no open LA County homeowner ADU financing programme either, though that is a negative search result rather than a county statement.
Two cost reducers that work like funding
State law waives development and school impact fees for ADUs of 750 square feet or less, effective January 2026. Given that standard permit costs on a Los Angeles build can exceed $40,000, that is a substantial real-dollar saving and a genuine argument for designing at or under 750 square feet where the layout allows.
State law also bars cities from requiring replacement parking when you convert a garage, which removes a cost that used to kill conversions outright.
Neither is financing, but both reduce the number you have to finance, which is the same thing arriving by a different route.
Can you sell the ADU separately to recover the cost
Not in Los Angeles. A 2023 state law lets cities opt in by ordinance to allow ADUs to be sold separately as condominiums. San Jose, Santa Cruz, Santa Monica, San Francisco and the City of San Diego have opted in, and unincorporated San Diego County became eligible in 2026.
The City of Los Angeles has not. A council motion was introduced in July 2025 and referred to committee, with no draft ordinance and no published timeline. Unincorporated LA County has not adopted either, and Long Beach, Sacramento and Oakland have been studying it.
So for now, assume in Los Angeles that the ADU stays part of your parcel and that your return comes from rent and appraised value rather than from a separate sale.
Los Angeles County figures, reviewed 2026-10-29 by America General Contractors, California contractor licence CSLB 1083262. Planning ranges, not a quote, and not legal advice. We confirm the current rules for your parcel before anything is drawn.
Questions
Is there any ADU grant available in California right now?
Not from CalHFA. That programme has been fully allocated since December 2023 and the agency warns that anyone offering to get it for you is running a scam. Pasadena and Long Beach run low-interest or deferred loan programmes, which are not grants but are considerably cheaper than market financing.
Can I use the future rent to qualify for the loan?
Yes, within limits. Fannie Mae, Freddie Mac and FHA all allow it now, capped at 30 percent of your total qualifying income, and FHA counts only 50 percent of the rent on the rehabilitation product used to build. None of them allow it on a cash-out refinance.
What is the cheapest way to finance an ADU?
If you qualify, a city programme. Pasadena at 1 percent and Long Beach at 2 percent with deferred payments are far below market. Both require income qualification and both attach long rental commitments, usually to voucher holders, which is a real obligation rather than a formality.
Do I need to be low income?
For the city programmes, generally yes or close to it. Pasadena prioritises below 80 percent of area median income and Long Beach uses the state's lower-income definition. The conventional products have no income ceiling.
Will the ADU appraise for what it cost?
Usually close, in a market with comparable sales. Where it gets difficult is the comparable requirement itself: Freddie Mac wants at least one comparable sale with an ADU and at least one comparable rental with a rented ADU. In neighbourhoods with few permitted ADUs that can be the thing that stalls a file.
Related reading
- How much does an ADU cost in Los Angeles?
- Can I build an ADU on my property in Los Angeles?
- Does a remodel increase property taxes in California?
- ADU Cost Per Square Foot in Los Angeles
- Does an ADU Raise Your Property Taxes?
- Garage Conversion Cost in Los Angeles
