ADU Financing · 2026
ADU Construction Loan Guide
An ADU construction loan, more precisely called a construction-to-permanent loan, funds your ADU build in stages as work is completed, then automatically converts into a standard long-term mortgage once the home is finished. You close once, you draw money as milestones are hit instead of getting a lump sum on day one, and the loan you end up making payments on is a normal mortgage, not a temporary one. It is the financing tool built specifically for the fact that an ADU does not exist yet on the day you need the money.
The short version: A construction-to-permanent loan releases funds in stages tied to your project’s progress, then rolls into a regular mortgage when the ADU is done, all through a single closing. Lenders approve the loan based on what your property will be worth once the ADU is built, not just what it is worth today. Exact terms, rates, draw structures, and qualification rules vary by lender and change over time, so treat this as a guide to how the process works and confirm your specific numbers with a lender before you commit.
How the draw schedule actually works
With a construction-to-permanent loan, you are not handed the full loan amount at closing. Instead, the lender releases money in a series of draws, each one tied to a milestone in the build.
A typical draw schedule might release funds after events like:
- Permits are approved and the contract is finalized
- The foundation is poured and inspected
- The home reaches a defined stage of completion at the factory or on-site
- Delivery and installation are complete
- Final inspection and utility hookups are signed off
Before each draw, the lender (often through a third-party inspector) confirms the work is actually done to that stage before releasing the next chunk of money. This protects the lender from funding work that has not happened, and it protects you from paying interest on money that is still sitting unused. During the draw period, most borrowers pay interest only on the portion of the loan that has actually been disbursed, not on the full loan amount.
Why lenders underwrite the “as-completed” value
This is the detail that trips people up. A construction loan is not sized against what your property is worth today. It is sized against what an appraiser expects the property to be worth once the ADU is finished, sometimes called the “as-completed” or “after-completion” value.
That distinction matters because it is what makes a construction loan useful even for homeowners who do not have a lot of equity sitting in their home right now. The lender is effectively betting on the finished project, not just your current balance sheet. To make that bet, they need real documentation: a firm budget, a set of plans, and a contract with a licensed builder, so the appraiser has something concrete to value against.
This is also why the quality and completeness of your paperwork matters so much. A vague budget or a builder who cannot produce fixed numbers makes underwriting slower and can make the appraiser more conservative. A fixed, itemized price is exactly what an underwriter wants to see.
The single-close advantage
Before construction-to-permanent loans became common, homeowners often needed two separate loans: a short-term construction loan to fund the build, then a second, separate mortgage to pay off the construction loan once the home was done. That meant two applications, two sets of closing costs, two appraisals, and two chances for your rate or your financial situation to change between closings.
A construction-to-permanent loan collapses that into one closing. You qualify once, you close once, and the loan automatically converts into a permanent mortgage on a set schedule (usually tied to the project’s completion) without a second round of underwriting or a second set of closing costs.
| Two-loan process | Construction-to-permanent (single close) | |
|---|---|---|
| Number of closings | Two | One |
| Closing costs paid | Twice | Once |
| Rate risk between loans | Yes, rate can move before the second loan | Locked in at the single closing (terms vary by lender) |
| Appraisals required | Often two | Typically one, based on as-completed value |
| Paperwork burden | Higher overall | Front-loaded, then simpler at conversion |
| Funds released | Lump sum or separate draw process, then a refinance | Staged draws, then automatic conversion |
What documentation a lender typically wants
Because the lender is underwriting a project that does not exist yet, they lean heavily on paperwork to prove the project is real, priced accurately, and being built by a qualified party. Expect to provide something close to this list:
- A signed contractor agreement naming the builder and the scope of work
- Complete plans for the ADU, including site plans and floor plans
- A firm, itemized budget showing what the total cost covers
- Proof of the builder’s license and relevant insurance
- Standard borrower documentation: income, assets, credit history, and existing mortgage details
- A draw schedule outlining what triggers each disbursement
Every lender’s exact checklist differs, and some ask for more than others depending on the loan program. This is general information about how these files typically come together, not a promise of what any specific lender will require for your loan, so confirm the exact list with the lender you choose before you start gathering paperwork.
Why a fixed, all-inclusive price makes this unusually predictable
Site-built construction loans have a reputation for being stressful partly because site-built budgets move. Change orders, unexpected site conditions, and mid-project scope changes are common, and each one can force a budget revision, a new appraisal conversation, or a delay in the next draw.
Framework First’s ADUs are priced differently. Our 14 models run from $180,000 for the Four Fifty, a 450-square-foot studio, up to $557,000 for the Twelve Hundred U, and that price is fixed in the contract before your loan closes. It builds in a permitting budget along with plans, the foundation, the factory build, delivery, utility hookups, appliances, and final inspection. Actual permit costs are set by your city and county, so they are property-specific and get confirmed during your feasibility study, and property-specific site work such as septic upgrades or retaining walls isn’t part of that price, though we offer it in-house as part of your contract. Because roughly 97% of the home is built in our Salinas factory under controlled conditions and then crane-delivered to the property, there is far less room for the kind of surprise costs that complicate a draw schedule. Typical delivery runs 4 to 9 months depending on the model.
That predictability is exactly what a construction loan underwriter wants to see: a firm number, a firm plan, and a firm timeline, rather than an open-ended budget that could grow.
Connecting this to your build
If a construction-to-permanent loan sounds like the right fit, the most useful next step is getting real numbers to bring to a lender. Start with a free feasibility study to confirm what your lot allows and which model fits. Run the ROI calculator to see estimated monthly payments and, if you plan to rent the ADU, projected income side by side. Review the full pricing breakdown so you know exactly what the price, permitting budget included, covers before you sit down with a loan officer. And if you are still comparing this loan type against other financing options entirely, our broader guide on how to finance an ADU in California walks through the alternatives, including HELOCs and cash-out refinances, side by side.
Frequently asked questions
Is a construction-to-permanent loan the same as a regular construction loan?
Not quite. A standalone construction loan is often short-term and requires a separate refinance into a mortgage once the build is done. A construction-to-permanent loan bundles both steps into a single closing, converting automatically into a permanent mortgage when the project is complete. Ask any lender you are considering which structure they offer, since naming conventions vary.
How is the loan amount determined if the ADU does not exist yet?
The lender typically has the property appraised for its expected “as-completed” value, meaning what the home and lot are projected to be worth once the ADU is finished, rather than appraising only the property as it sits today. Your firm budget, plans, and contractor agreement are what support that projection, which is part of why a fixed price with a permitting budget built in is helpful during underwriting.
Do I make payments during construction?
Most construction-to-permanent loans charge interest only on the funds that have actually been drawn so far, not on the full approved loan amount. Once the loan converts to a permanent mortgage after completion, payments typically shift to standard principal-and-interest terms. Exact structures vary by lender, so confirm the payment schedule before you sign.
What credit score or down payment do I need?
This varies significantly by lender, loan program, and your overall financial picture, including your existing mortgage balance, income, and the projected as-completed value of your property. There is no single universal number we can quote here that would stay accurate over time. A lender can review your specific situation and tell you exactly what you qualify for.
Does Framework First offer construction loans directly?
No. We are a builder, not a lender, and we do not originate loans or set loan terms. We can introduce homeowners to ADU-focused lending partners, but the loan itself always comes from a licensed lender you choose, and we recommend comparing terms from more than one before committing.
Ready to see real numbers for your property? Start with a free feasibility study and bring the results to your lender.