Thinking about adding an accessory dwelling unit on your Montgomery County property, but not sure how to pay for it? You’re not alone. The right financing can turn a good idea into a project that cash flows and adds long‑term value. In this guide, you’ll learn proven loan paths, how to count ADU rental income in qualifying, and ways to stack Green Bank and energy incentives. Let’s dive in.
ADUs in Montgomery County: The basics
Montgomery County allows attached, detached, and conversion ADUs on most single‑family lots, and many are by right. Start with Montgomery County’s ADU program page for definitions, licensing, and permit steps, then review the county planning team’s ADU policy summary for context on recent zoning updates. You must obtain a building permit from DPS before construction and secure a Class 3 ADU license through DHCA. The county fee table shows an example total around $615 due with a new ADU application, but you should confirm current fees.
What your ADU might cost
Actual budgets vary by scope, site conditions, and finishes. As a general frame, many basement or garage conversions start around $50,000 to $150,000, attached ADUs often run $100,000 to $250,000, and detached backyard cottages can range from $150,000 to $350,000 or more. Utility upgrades, stormwater, and site work can add materially to the total. Build in a contingency and verify costs with local contractors.
Renovation loans that fit ADUs
Renovation mortgages can be a strong match if you want one loan to cover your existing mortgage or purchase plus the build.
FHA 203(k)
HUD’s 203(k) lets you finance a purchase or refinance and the rehabilitation in one insured loan. The program supports properties with eligible ADUs, and HUD’s recent policy update allows some ADU rental income to help you qualify. See the FHA 203(k) overview and HUD’s ADU income guidance for details, including how much existing or projected rent can count.
Fannie Mae and Freddie Mac options
Fannie Mae’s HomeStyle Renovation and Freddie Mac’s CHOICERenovation can fund adding or updating an ADU. Many agency products allow ADU rental income in qualifying with documentation, such as leases or an appraiser rent schedule, and caps that vary by product. Review Fannie Mae’s ADU guidance and confirm lender‑specific rules early.
Construction or construction‑to‑permanent
For a ground‑up detached ADU, a construction or construction‑to‑permanent loan can finance building costs, then convert to a long‑term mortgage. These loans require approved plans, a qualified builder, and inspections. Budget time for underwriting and draws during construction.
Using equity: HELOC or cash‑out
If you have strong equity, a HELOC or cash‑out refinance can be faster to arrange than a construction loan. These products leverage your current home value to fund the build. Compare rates, closing costs, and payment impact, and make sure the draw timing fits your contractor schedule.
Green Bank options you can stack
Energy upgrades often go hand in hand with ADUs, especially if you are adding roof work, solar, or new electric loads.
Montgomery County Green Bank pilot
Montgomery County Green Bank partners with lenders to lower the cost of clean energy financing for county homeowners. A recent pilot with OneEthos and Climate First Bank offered subsidized residential solar loans and allowed battery storage and roof replacement when needed. Check the Green Bank’s pilot program update for current availability, since funding cycles can open and close quickly.
County and state incentives
If you plan to electrify your ADU with heat pumps, a heat‑pump water heater, or induction cooking, look at the county’s Electrify MC incentives. You can often pair county incentives with state programs and federal tax credits. The Maryland Energy Administration updates its Residential Clean Energy programs throughout the year, so timing matters.
How to bundle energy work
Consider sequencing roof replacement, electrical service upgrades, solar, and HVAC so you can use subsidized green financing alongside your main loan. Renovation loans like 203(k) or HomeStyle can include energy measures, and Green Bank partnerships may reduce the rate on solar and battery. Confirm program rules, required contractors, and pre‑approvals before you sign.
Step‑by‑step roadmap
1) Scope and feasibility
Define your ADU type, target size, and rough budget. Verify eligibility and process on the county ADU page, then plan for Class 3 licensing and DPS permits. Expect several months for design, permitting, and construction depending on complexity.
2) Match the right financing
Buying and building on day one often fits an FHA 203(k) or a Fannie renovation mortgage. Renovating a home you already own could call for construction‑to‑permanent, a HELOC, a cash‑out refi, or a renovation mortgage. If you are adding solar or electrification, layer in a Green Bank option if available.
3) Line up incentives
Confirm current Green Bank offerings, Electrify MC rebates, and MEA program timelines before work begins. Some programs require using approved contractors or submitting a pre‑approval. Lock down documentation and installation order to keep eligibility.
4) Permits and licensing
Apply for required building permits with DPS and coordinate inspections. Review DPS guidance on accessory residential structures. Submit your Class 3 ADU license application and plan for application and annual license fees.
5) Document rental income
If you plan to count ADU rent to qualify, tell your lender early. Be ready with leases, tax returns, or an appraiser rent schedule, since programs set limits on how much rent you can use. HUD’s ADU income policy explains FHA’s approach, and agency rules vary by product.
Common pitfalls to avoid
- Assuming incentives are guaranteed. Green Bank and state funds are limited and can sell out. Confirm availability before you rely on them in your budget.
- Underestimating site and utility work. Electrical upgrades, sewer connections, grading, and stormwater controls can push costs higher. Build a buffer.
- Misaligning financing and permitting. Some renovation loans require approved scopes and contractors at closing. Align your lender process with your permit path.
Make it pencil: three example paths
- Buying a home and adding an ADU: Use FHA 203(k) to wrap purchase and renovation, and count allowable ADU rent in qualifying if you meet HUD rules. Add Electrify MC incentives for heat pumps.
- Building a detached backyard cottage: Use a construction‑to‑permanent loan, then explore Green Bank‑backed solar financing that can include a roof and battery if the program is open.
- Converting a basement: Use a HELOC for speed, then apply for county incentives to electrify and improve efficiency. Keep documentation tidy in case you want to refinance later.
Ready to map your ADU plan in Montgomery County and pick a financing stack that fits your goals? Broad Branch’s developer mindset helps you sequence scope, permits, and capital so your project stays on track. If you want a practical, numbers‑first take on your site, connect with Shane Crowley to get started.
FAQs
Can I include solar and a battery in my ADU financing in Montgomery County?
- The Montgomery County Green Bank pilot offered subsidized solar loans that allowed battery storage and roof replacement when needed, but funding cycles change, so check the Green Bank’s current program status.
How does rental income from an ADU help me qualify for a loan?
- Many programs allow ADU rent in underwriting with documentation and caps, and FHA’s recent update details how much existing or projected rent you can count, so speak with your lender early about evidence they need.
What permits and licenses do I need for an ADU in Montgomery County?
- You need a building permit from DPS before construction and a Class 3 ADU license from DHCA, and you should confirm current fees on the county site.
What are typical ADU cost ranges I should plan for?
- Many basement conversions run about $50,000 to $150,000, attached ADUs often range $100,000 to $250,000, and detached ADUs can be $150,000 to $350,000 or more depending on site work and finishes.
Where can I find current county and state energy incentives that pair with an ADU?
- Start with the county’s Electrify MC page for local incentives, then check the Maryland Energy Administration’s Residential Clean Energy programs for state schedules and availability.
