How to Finance an ADU in Salt Lake County

Many Salt Lake County homeowners pay for an ADU by borrowing against the equity they've built, the gap between what the home is worth and what they owe, through a HELOC, a home equity loan, or a cash-out refinance. Others use a renovation mortgage or a construction loan. The right choice comes down to the rate you have now and a monthly payment your family can carry with peace.

On Wednesday we covered Utah's new ADU rules. Today: how to finance one.

Can I use my home equity to build an ADU?

Yes, in three main ways:

• HELOC. A line of credit secured by your home; you draw as you need it. The Consumer Financial Protection Bureau notes that HELOCs usually have adjustable rates, so the payment can change. It fits a builder who bills in stages.
• Home equity loan. One lump sum, with a fixed or adjustable rate.
• Cash-out refinance. You replace your mortgage with a bigger one and take the difference in cash. For a conventional loan on a one-unit primary home, Fannie Mae caps the new loan at 80% of the home's value.

A HELOC or home equity loan is a second mortgage, paid on top of the one you have, and it leaves your current rate alone. A cash-out refinance resets the rate on the whole balance. If you're holding a low rate, compare your blended rate across every debt, not just the new rate. Either way, your home secures the loan.

Can a renovation loan pay for an ADU?

A renovation mortgage rolls the cost of the work into one loan when you buy or refinance.

• FHA 203(k), standard. HUD lists adding an attached ADU, converting part of a home into an ADU, and renovating an existing ADU as eligible work. The limited 203(k) can't be used for an ADU. For a new detached cottage, ask a 203(k) lender.
• Fannie Mae HomeStyle Renovation. A conventional loan that can finance an ADU, detached included, when it meets local zoning and codes.
• Freddie Mac CHOICERenovation. Can add a new ADU or renovate an existing one, like converting a garage.

What about a construction loan or a personal loan?

A construction loan pays your builder in draws as the work gets done, and some convert into a regular mortgage at the end. A personal loan doesn't put your house on the line. Compare rate, term, and monthly payment before you sign.

Can future ADU rent help me qualify?

Sometimes. Lenders look at your debt-to-income ratio, your monthly debt payments compared with your monthly income. The rules depend on the loan:

• FHA can count projected rent, based on the appraisal, the value report from a licensed appraiser. On a 203(k), the lender uses only half of it.
• Fannie Mae counts rent only from an ADU that already exists.
• Freddie Mac counts rent from a legal ADU, but on CHOICERenovation it won't count rent from the unit the loan is building.

ADU rent can't make up more than 30% of your qualifying income, and none of the three counts it on a cash-out refinance.

Are there ADU loans or incentives in Salt Lake County?

In Salt Lake City, yes. Backyard Keys, run by the city's Community Reinvestment Agency with the Community Development Corporation of Utah, lists construction loans of up to $200,000 at a 3% fixed rate for owner-occupants west of I-15. Households earning above 80% of area median income must rent the ADU or the main home at an affordable rate. Funding is limited.

At the state level, S.B. 284 opened the door to more backyard homes, but it didn't create a loan program to build them.

What about taxes and insurance?

• Property taxes. An ADU adds value, so your assessed value can rise. Utah's residential exemption can apply to a home that's someone's primary residence, a tenant's included. Vacation rentals don't qualify. Ask the Salt Lake County Assessor how your unit will be treated.
• Federal taxes. The IRS says interest on a HELOC or home equity loan is deductible only when the money buys, builds, or substantially improves the home securing it. Rent is taxable income. Talk with a tax preparer.
• Insurance. Call your agent before the build, and ask whether you'll need landlord coverage if you rent it.

What's a simple next step?

Confirm your lot qualifies with your city and get real bids. Then ask a licensed lender for a Loan Estimate, the standard form showing rate, payment, and closing costs, for each option.

Top Level Home Loans, an independent mortgage company we work with, can run those numbers at toplevelhomeloans.com. You're not required to use them. Any licensed lender can do this. GR Homes is the real estate brokerage; Top Level is the mortgage company.

To see whether your property might qualify, download our Gomez Rueda Realty Group ADU Guide 2026. We have more GR Homes guides, too. If you'd rather talk it through, we're here.

FAQ

Can I use an FHA loan for an ADU? Yes, the standard FHA 203(k) covers certain projects, like adding an attached ADU or renovating an existing one.

Does ADU rent count toward qualifying? It can, up to 30% of qualifying income, depending on the loan.

Does Salt Lake City offer ADU loans? Yes. Backyard Keys lends to owner-occupants west of I-15 while funds last.