Most people don't pay for a backyard home out of a checking account. They borrow against the house they already own, or they use a loan built for exactly this kind of project. Which one fits depends on your home, your mortgage and your lender, so this isn't advice. It's a plain map of the options, so the first call to your lender is a short one.
Cash or savings
The simplest version. There's no approval to wait on, so you can accept a firm quote as soon as it arrives.
A home equity line of credit (HELOC)
A credit line against the equity in your home. You draw what you need when you need it, and you usually pay interest only on what you've drawn. That fits a build that's paid in stages.
The limit depends on what your home is worth and what you still owe on it, and approval usually takes a few weeks with an appraisal. Apply early, and ask for a limit that covers the whole project, not just the building.
A cash-out refinance
A new, larger mortgage that replaces the one you have and pays out the difference in one lump sum at closing. You get all of it at once, and your existing mortgage goes away, so the new rate matters a lot.
A construction loan
The lender pays your builders in stages as the work is inspected. Before approving, lenders usually want the plan set, a firm quote and a licensed contractor. Ask yours early how it pays a fabricator, because the steel frame is often one of the first large payments.
A renovation loan
One mortgage that covers the project, like an FHA 203(k) or a Fannie Mae HomeStyle loan, often lending against what the home will be worth when it's done. These come with their own rules about contractors and inspections, so the lender leads.
Whatever you use, size it to the whole project
The building is one line. The full number also includes your general contractor, the materials if you're finishing it yourself, site work, permits and fees, and a cushion of 10 to 15 percent for surprises. Our post on the costs around a backyard building has the list.
A fixed design and a firm price make a lender's job easier. That's one reason to design first: the designer gives you a site plan and an estimate you can hand to your lender before anyone has broken ground.
Ekstra isn't a lender, and we don't recommend one. Your lender can tell you which of these fits.