Your equity, and which route it points to
A cash-out refinance and a HELOC both draw on the equity you have today, so the first question is how much of it is left once the lender's limits are applied. A renovation loan is different: it lends against what the home will be worth with the ADU finished, as the appraiser estimates it from the plans. Thin equity today does not end the conversation, but it does narrow it to the routes that look forward rather than back.
Your income, because this is a loan on the home you live in
Every route on this page is a consumer loan on your primary residence. For a cash-out refinance, a renovation loan or a closed-end home equity loan, federal rules require the lender to verify that you can repay the loan from your income or assets; a HELOC sits outside that rule, and its lender sets its own requirements. Some programs let part of the ADU's expected rent count toward qualifying, with conditions on how that rent is documented, but it supplements the verification rather than replacing it. Pay stubs, tax returns and bank statements are the file, as on any home loan.
The plans, the budget and the builder
A renovation or construction lender reviews the contractor, the plans and the budget before closing, pays the money out in draws as the work is done and checked, and sets a date the work must be finished by. A cash-out refinance or an equity line pays the money to you after closing rather than in draws, which asks less of you. Bring real bids, not an estimate from a calculator.
The property and the appraisal
An appraiser values an ADU from comparable sales, and there may be few finished units nearby to compare it with, so an ADU does not always appraise for what it cost to build. That matters most on a renovation loan, which is sized on the finished value, so bring the plans with the application.
Where ADU financing is not the answer
If the equity is thin and you do not want the draws, the inspections and the lender's review of the contractor that come with a renovation loan or a construction loan, none of the four routes fits. The honest alternatives are to build equity first, to scale the project to what the equity will carry, such as converting a garage or existing space rather than building detached, or to wait and see whether a grant round opens.
