The Quick Read: You qualify the way you would for any cash-out loan. The lender looks at your equity, your credit, your income against your debts, and how long you have owned the home. The twist is the appraisal. On a standard cash-out, the appraiser values the home as it stands today, so an ADU you have not built yet adds nothing to your borrowing power.
An ADU, or accessory dwelling unit, is a small separate living space on the same lot as your home. Think backyard cottage, garage conversion, or basement apartment.
Key Takeaways
- A standard cash-out refinance is capped at 80% of the home’s current value on a one-unit primary residence.
- The first mortgage you pay off generally has to be at least 12 months old.
- Income from an ADU you have not built does not help you qualify.
- A renovation loan can lend against the finished value, but it follows different rules and fewer lenders offer it.
Cash-out refinance estimate
The starting figures are an example value with a balance and a cash request in proportion. Replace them with yours.
Editable benchmark: 7.18% as of November 5, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the agency cap on a one-unit principal residence, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a cash-out refinance quote; a cash-out loan is priced by the lender at lock. The cash available is the loan the program cap allows less the balances paid off, before closing costs, which are not included. The HELOC line is the program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. Licensed in sixteen states for consumer mortgages.
What a Cash-Out Refinance Actually Does for an ADU
A cash-out refinance replaces your current mortgage with a new, larger one and hands you the difference in cash. You can spend that cash on anything, including a contractor. The lender does not care that it is an ADU. It cares that the new loan fits the equity, credit, and income rules.
Equity is the part of your home’s value you own outright: value minus what you owe. Loan-to-value, or LTV, is the new loan divided by the home’s appraised value. LTV is the number that sets your ceiling.
Lendmire’s cash-out refinance programs page lays out the options available through the wholesale lenders Lendmire works with, as a broker, in 16 states. One point trips up many plans: the ADU’s future value does not count toward the loan amount on a standard cash-out.
Here is the leverage picture on a conventional cash-out, subject to lender guidelines and full file review:
| Property | Typical max LTV |
|---|---|
| One-unit primary residence | 80% |
| Two- to four-unit primary residence | 75% |
| Second home | 75% |
| Investment property | 75% |
A second home or a rental follows the lower figures in the table, because occupancy sets the leverage. The rest of this article is written for the home you live in.
How the Loan Is Underwritten, Step by Step
Underwriting is the lender’s review of whether you and the property fit the program. Here is the order it usually runs in.
1. Pick the structure. You choose between a standard cash-out refinance and a renovation refinance.
2. Check the equity. The lender takes the appraised value, multiplies by the LTV cap, and subtracts what you owe. What is left is the cash available to you. Closing costs and any liens being paid off come out of that room too.
3. Confirm ownership and seasoning. Seasoning is the waiting period a lender wants before a refinance. On a conventional cash-out, the first mortgage being paid off must be at least 12 months old, counted from note date to note date. Exceptions exist for delayed financing, inheritance, and legal awards. Fannie Mae’s Selling Guide describes the delayed financing exception for recent buyers, and cash-out pricing applies to those loans.
4. Run credit and ratios. The wholesale conventional programs start at a 620 decision score. The automated underwriting finding governs most files, with a total debt-to-income ceiling of 50%. Loans underwritten manually use a ratio of 36% or 45%, depending on score and reserves, so the 50% ceiling does not apply to them. Reserves are cash you hold after closing. Fannie Mae’s Eligibility Matrix requires minimum reserves on cash-out files once ratios run above a set level. Past credit events also carry agency waiting periods: four years from a chapter 7 discharge, seven from a foreclosure, and four from a short sale or deed-in-lieu, any of which documented extenuating circumstances can shorten.
5. Order the appraisal. The appraisal is covered in the next part of this article, because the as-is value it reports drives the whole equity calculation.
6. Verify income and assets. Expect pay stubs, tax returns or business documents, and bank statements. Self-employed borrowers document income through returns and business records, subject to the program.
7. Review the disclosures. You receive a Loan Estimate early and a Closing Disclosure before signing. Compare the cash to close on the Loan Estimate with what you expected.
The Appraisal Problem: An Unbuilt ADU Adds No Value
Say you own a home worth a certain amount today and plan an ADU that would add meaningful value. On a standard cash-out, the appraiser reports the as-is value. The 80% cap applies to that number. The finished ADU is a future fact, and the lender cannot lend against it.
Run it in percentages. Suppose your current balance is 55% of the home’s value. The 80% cap leaves room equal to 25% of the value. Closing costs and any other payoffs come out of that 25%, and the rest is your building budget. If your balance is 70% of value, you have 10% to work with, minus costs. That may not cover the build.
This is why equity decides the project. If the budget is bigger than the room, you have three honest paths:
- Phase the project and build the shell first.
- Add a second funding source, such as savings.
- Choose a renovation loan that tests leverage against the finished value.
Can ADU Rent Help You Qualify?
Not a planned one. Fannie Mae’s rental income rule counts ADU rent only from one existing ADU, and only on a one-unit primary residence. It also caps the portion of that rent that counts toward your qualifying income. A unit that is still a set of plans produces no counted income at application.
So you qualify on your existing income, and the new, larger payment has to fit inside your ratios. A “rent will cover it” argument cannot carry the file. If your debt-to-income ratio only works with ADU rent in the numerator, the file needs a different structure or a smaller loan.
Cash-Out, Renovation Loan, or HELOC?
A renovation loan folds the build cost into the mortgage and tests leverage against the as-completed value. A HELOC, or home equity line of credit, is a separate credit line behind your first mortgage. Each fits a different homeowner.
| Option | How it works | Best when |
|---|---|---|
| Standard cash-out | New first mortgage, lump-sum cash | Equity is ample, current loan is not worth keeping |
| Renovation refinance | Lends against finished value | Equity is tight but the plan is solid |
| HELOC or home equity loan | Second lien behind your first | You want to keep your existing first mortgage |
Fannie Mae’s HomeStyle Renovation lists accessory dwelling units among eligible projects. It sets no minimum project size, and the home does not need to be habitable at closing. Renovation costs can be financed up to a set share of the as-completed value, and the appraisal is written “subject to” the planned work. Documents get heavier: a renovation contract, a loan agreement, and lien waivers. Availability varies by lender, so ask early.
Fannie Mae has also widened how many ADUs a property can carry, but only on loans appraised on its newer appraisal form. Confirm current Guide wording with your loan officer before you design around it.
A lump-sum cash-out has its own wrinkle. There is no draw schedule, so you hold the cash and manage contractor payments and overruns yourself. A renovation loan usually releases funds in stages, which protects you but adds paperwork. The choice between these two comes down to how much structure you want around the money.
The CFPB’s home equity guide points out that a cash-out refinance may extend the time it takes to pay off your mortgage, and that your payment may rise because the loan is larger. Compare that to a HELOC, which leaves your first mortgage alone.
The difference matters most if your current mortgage is a good one. Replacing it resets the entire balance, not just the cash portion. With a loan you like, a second lien may be worth weighing against a cash-out, even if the cash-out looks simpler.
Where the General Rule Breaks
A few situations bend the rules above.
FHA borrowers. A standard FHA cash-out is for owner-occupied principal residences and carries an occupancy and ownership history requirement. The FHA Streamline is a different tool. It applies to an existing FHA loan, skips the appraisal, and requires a net tangible benefit. It is not a cash-out product and is not designed to fund a build.
VA borrowers. The VA IRRRL refinances an existing VA loan with a 0.5% funding fee unless you are exempt. It requires a net tangible benefit and seasoning of the later of 210 days and 6 payments. It is not meant to pull equity out. A veteran who wants to fund an ADU looks at the VA cash-out refinance, which has its own leverage limits that vary by lender.
Texas homesteads. A cash-out on a Texas homestead, known as a Section 50(a)(6) loan, is capped at 80% of the home’s value by the state constitution. The no-mortgage-insurance wholesale lane described next is not written there.
Higher leverage without mortgage insurance. Mortgage insurance is generally required above the standard conventional leverage threshold on the agency path, except for one wholesale cash-out lane. Outside Texas homesteads, that lane goes past the threshold, staying below 90% LTV, with no mortgage insurance. It requires a 680 score, a 50% ratio, a 30-year fixed term, a primary residence, a conforming balance, and six months of seasoning. It is the exception, not the norm, and it is subject to lender guidelines.
Jumbo loans. Above the conforming loan limit, jumbo programs take over, and their scores and leverage differ from the figures above.
Co-owner buyouts. Buying out a co-owner under a written agreement is a limited cash-out transaction at both agencies. That is a separate transaction from funding a build.
Limited cash-out is not “no cash.” A rate-and-term refinance allows small incidental cash back. Fannie Mae’s limit is the lesser of 2% of the new loan or $2,000. Freddie Mac’s is the greater of 1% of the new loan or $2,000. That is not enough to build anything.
Property type. Manufactured homes, condos with association approval requirements, and multi-unit properties each add their own conditions. Local zoning, permits, and fees also sit outside any national rule. Confirm your lot can legally hold an ADU before you borrow against it.
What the Decision Looks Like in Practice
Picture a homeowner with a one-unit primary residence owned for several years, a balance near half of the home’s current value, and solid credit. The standard cash-out fits. There is ample room under the 80% cap, the seasoning is met, and the larger payment sits inside the ratio ceiling. The homeowner trades the existing first mortgage for a new one and builds with the proceeds.
Now picture a second homeowner whose balance sits near 75% of value. The standard cash-out leaves almost nothing after costs. That borrower compares a renovation refinance, which tests leverage against the finished value, with a HELOC if the existing first mortgage is worth keeping. A third borrower with an existing VA loan checks whether the VA cash-out route fits instead of an IRRRL.
In each case the real decision is the same. Compare the full cost of the new loan against what you give up by replacing your current one, then confirm the plan fits your budget with the larger balance.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Common Reasons Files Stall
- Counting on ADU value or ADU rent that does not exist.
- Leaving too little equity after closing costs and payoffs.
- Replacing a strong first mortgage when a second lien would do.
- Missing the 12-month seasoning on the loan being paid off.
- Skipping the zoning and permit check on the lot.
- Treating a second kitchen as an ADU. A true ADU has its own living, sleeping, cooking, and bathroom facilities, sits on the same parcel, and is smaller than the main home.
- Assuming an FHA Streamline or VA IRRRL can fund the build.
Key Terms Defined
ADU (accessory dwelling unit): A separate, smaller living space on the same lot as your primary home.
Cash-out refinance: A new mortgage larger than your current one, with the difference paid to you in cash.
LTV (loan-to-value): The new loan amount divided by the home’s appraised value.
Seasoning: The waiting period a lender requires before you can refinance, such as holding the first mortgage for 12 months.
As-completed value: The appraiser’s estimate of what the home will be worth after planned work is finished.
Reserves: Cash or liquid assets you still hold after closing.
Frequently Asked Questions
Can I use a cash-out refinance to build an ADU?
Yes, because cash-out proceeds carry no use restrictions on a standard loan. The catch is that the lender values the home as it is today. Your borrowing room depends on current equity, not the finished ADU, subject to lender guidelines and full file review.
How much equity do I need?
On a one-unit primary residence, the new loan generally cannot exceed 80% of the home’s current value, so at least 20% stays in the home. What you can take out is that cap minus your current payoff minus closing costs. A renovation loan can test leverage against the as-completed value, but it carries added documentation.
What credit score and debt ratio do lenders look for?
The wholesale conventional programs start at a 620 decision score, with a total ratio ceiling of 50% on automated approvals. Manual underwriting is tighter. Higher scores and more reserves can strengthen the file, though the lender makes the final call.
Does the planned ADU’s rent count toward qualifying?
No. Rent counts only from one existing ADU on a one-unit primary residence, and only a limited portion of it. A unit you have not built produces no counted income at application.
Is a HELOC better than a cash-out refinance for an ADU?
It depends on your current mortgage. A HELOC leaves your first mortgage untouched, which helps if that loan is a good one. A cash-out replaces the whole balance and may suit you better if you want one fixed loan and your current terms are not worth keeping. The CFPB suggests comparing the two on cost, since either can come out ahead.
Next Step
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. Nothing here is a commitment to lend, and every program figure is subject to lender guidelines.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
2. Fannie Mae Eligibility Matrix
3. Fannie Mae Selling Guide B3-3.8-02, Rental Income, Subject Property
4. Fannie Mae HomeStyle Renovation
5. CFPB Guide to Using Home Equity
This article is part of Lendmire’s cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How to Qualify and Apply for a 15-Year Cash-Out Refinance to Pay Off Debt and Build a Deck · How to Qualify and Apply for a Cash-Out Refinance Before Twelve Months on Title · How to Qualify and Apply for a Cash-Out Refinance on a Fourplex
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.