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The CalHFA ADU Grant Program will cover up to $40,000 of the pre-construction costs associated with your ADU. And most homeowners qualify.
We have some exciting news for California homeowners who want to build an accessory dwelling unit.
The California Housing Finance Agency's (CalHFA) ADU Grant Program provides up to $40,000 of the costs associated with the ADU.
And that’s not even the best part. As this is a grant and not a loan it does not have to be repaid. No interest. No monthly payment.
To qualify for the grant, you first need to obtain a loan from a CalHFA-approved lender. You also need to fall within a certain income range, which varies by county.
However, this shouldn’t discourage you as the limits are pretty generous.
For example, the income limit for LA is $180,000, while San Francisco citizens can earn as much as $300,000 and still qualify for the grant.
You must have a lot of questions already. For instance, why would you need a loan to be eligible for the grant? Or what can be considered an ADU and what services are considered pre-development?
Keep on reading and we promise that by the end of this article you will know everything there is to know about the CalHFA ADU Grant Program.
How does the CalHFA ADU Grant Program work?
To qualify for the CalHFA ADU Grant Program, you first need a construction or renovation-type loan. This is because the program is aimed at homeowners who already need to use financing for the project.
And you can only use a loan from one of CalHFA’s pre-approved lenders list.
The loan needs to have a managed escrow, meaning that the lender will release a certain amount of funds after each phase of the ADU project is completed.
There’s no need for you to worry about this though. The lender will be taking care of it and guide you through the process.
After this loan is approved, the lender will send your paperwork to CalHFA. And if you are eligible for the grant, $40,000 will be added to the pre-existing funds from the loan.
“We will not hand $40,000 to you, that’s not the way the grant works. We will, however, if you are eligible for the program, put an additional $40,000 with your other financing to make your project whole” - Molly Ellis, Training and Outreach Manager at CalHFA (How To ADU Podcast
For example, if all of the ADU project costs amount to $200,000, the lender will fund $160,000 and CalHFA will put in an additional $40,000.
So, after successfully completing the application, you will have access to the following funds:
- $40,000 from CalHFA’s grant that will cover your pre-construction costs
- $160,000 from the lender that you will use to cover your construction costs
The funds from CalHFA’s grant do not need to be paid back, while the loan from the lender must be paid back.
Are you qualified for the CalHFA ADU grant?
Now that we cleared up how CalHFA’s ADU Grant works, let’s move on to the second most important question: Who qualifies for this grant?
There are two requirements you need to meet to qualify for the CalHFA ADU grant:
- You need to live in and own the property where the ADU will be built
- You need to meet the low-to-moderate-income limits
Keep in mind that the lender might have some additional requirements for the loan.
These can be different depending on the loan type and lender in question. (We will elaborate on this too)
1 - You need to live in and own the property where the ADU will be built
This one is pretty straightforward. To get CalHFA’s ADU grant you need to:
- Own the property where the ADU will be built
- Live in the primary house on said property
Molly Ellis, a Training and Outreach Manager at CalHFA also pointed out that this loan is strictly for homeowners and not for investors.
"If you're an investor and you've got a property that you're building an ADU on, it's really amazing that you are doing that, but this program isn't for you." - Molly Ellis, Training and Outreach Manager at CalHFA (How To ADU Podcast)
2 - You need to meet the low-to-moderate-income limits
The first thing you need to know is that the income limits are for the borrower, not the whole household.
This means that the homeowner that applies for the grant needs to meet the income criteria, which are different for every county.
For example, the limit for counties such as Del Norte and Imperial is $159,000. On the other hand, counties such as San Francisco and Santa Clara go up to $300,000.
You can find the full income limits list here and see if you’re eligible for the grant.
Which costs will be covered by the grant?
The funds from the grant must be used solely for covering the pre-construction costs.
Pre-construction costs (also known as soft costs) include the following:
- Site preparation - the work done on your land prior to construction, including finalization of the location details, gaining access to the site, drainage, etc.
- Architectural Designs - drawings of what the final construction would look like)
- Permits - authorizations issued by a city or county to construct a project - in this case, your ADU.
- Soil Tests - tests that reveal the characteristics, nature, and reactivity of soil, which can affect construction decisions later on.
- Impact Fees - a one time fee paid to the municipality, meant to offset the financial impact of the new development on public infrastructure.
- Property Survey - determining and confirming land boundaries and other restrictions related to the legal description of the property.
- Energy Reports - personalized reports that will give information about the ADU’s energy use (gas, electricity or both).
The grant money cannot be used for building materials or construction labor as those fall under construction costs.
What happens if these expenses cost less than $40,000?
If your pre-development costs end up being less than $40,000, the excess funds can be applied to non-recurring closing costs.
Non-recurring closing costs are costs that are paid once and never again, such as loan fees and interest rate buydowns.
What is an interest rate buydown?
With an interest rate buydown, you can get a lower interest rate by paying discount points at closing. Discount points are a one-time fee that you pay upfront, where 1 discount point equals 1% of the loan. And by paying these discount points, your interest for the loan will be lower.
For example, your lender may offer to reduce your interest rate by .25% in exchange for a point. And if your mortgage is $200000 with an interest rate of 4%, by paying $2000 your interest would now be 3.75%.In addition to buydowns over the life of the loan, there are different loan structures available, so if you are interested in covering these costs with the grant, it’s best to discuss options with your lender.
What happens if you already paid out of pocket for some of these expenses?
If you already paid for some of these costs before applying for or getting the grant, the money cannot be reimbursed directly to your pocket.
However, the amount can be applied by your lender to reduce the principal from your loan.
For example, let’s say that you already paid $10,000 out of pocket for permits.
If you keep the receipts, you can give them to your lender who will redistribute $10,000 of the grant money toward paying off the principal of the loan.
So, even though the reimbursement money will not reach your pocket, it will reduce the amount you need to pay back for the loan.
What happens if you abandon the project, can you still get the grant?
Yes. Make sure to discuss this with your lender before starting.
How to start the application process
The quickest way to get started is to talk to one of the lenders listed on CalHFA’s website.
The lender will tell you whether you are eligible for the grant and guide you through the whole process. You will also learn more about which construction and renovation type loans you are eligible for.
We spoke to Land Home Financial Services (one of the CalHFA-approved lenders) about the application process. Here’s what we learned:
- In order to apply for the construction grant, you will first need to provide plans for your ADU (architectural drawings, structural plans, etc.), as they are needed by the lender.
This means that you’ll need to hire a General Contractor or an Architect in order to have your plans and design ready before officially starting the application process for the grant.
Only after providing the plans, the lender can hire an appraiser and determine the amount for your loan and start off the grant application process.
CalHFA even designed a 5-step roadmap which can give you a better idea of the process structure.
The 5 phases of building your ADU with CalHFA’s grant
CalHFA structured the whole process - from applying to actually building the ADU into 5 phases:
- Application The homeowner applies for a construction loan with an approved lender and fills out the ADU grant application forms.
- Loan approval The lender approves the construction loan, prequalifying the homeowner for the CalfHA ADU grant.
- Pre-development Pre-development work starts, paid through the construction loan account. Meanwhile, the lender sends the ADU grant application to CalHFA, including the costs and invoices of predevelopment.
- Grant disbursement CalHFA approves the grant and wires the fund to the loan account.
- Construction - Construction of the ADU, financed with the construction loan.
You can read more about the application process and required documents here.
Are there any costs that you need to pay upfront?
As we already mentioned, you will need to provide architectural plans and drawings for the ADU so that the lender can approve your loan, meaning that you might need to pay upfront.
And although these upfront costs will come out of pocket, they will later be reimbursed by the grant. (Just a reminder, they will not be refunded directly to you, but will be used to reduce the principal of your construction loan).
Keep in mind that sometimes these costs can be up to $20,000.
Approved ADU Loan Lenders
Right now there are 18 approved loan lenders listed on the CalHFA website.
Each lender offers a range of loans you can choose from to fit your specific needs. And even if you don’t find a lender or loan that matches your needs now - don’t give up.
As the application for lenders is open, there are surely more to come.
Some of the approved loan lenders include:
- Land Home Financial Services
- Primary Residential Mortgage, Inc
- CalCon Mortgage, Inc
CalHFA’s approved lenders offer different loan options for financing your ADU. Some of the most common financing options that people choose include:
- Cash-out refinancing loans
- Home equity loans & HELOCs
- Construction and renovation loans
1 - Cash-Out Refinancing loans
In a cash-out refinance, a new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash.
Then you can use that cash to cover the ADU construction expenses.
2 - Home equity loans and HELOCs
As a homeowner, you can use your equity to secure funds for building your ADU.
You can do this by taking out a home equity loan or a home equity line of credit (HELOC), both of which are loans that use your home as collateral.
A HELOC will allow you to borrow money as needed with a variable interest rate, while a home equity loan will secure a lump sum that needs to be paid back in fixed installments.
3 - Construction and renovation loans
Another favorable option for homeowners is to take out a construction or renovation-type loan.
According to Land Home Financial Services, a lot of customers use the Fannie Mae Homestyle renovation loan.
They choose it because it works with the CalHFA ADU grant and can get them qualified for larger amounts.
This is because the loan uses the post-renovation value of the ADU, meaning that you can tap into future equity and pull out $100,000 - $200,000+ for building your ADU.
Potential drawbacks and weaknesses
One of the reasons more people aren’t taking advantage of CalHFA’s ADU grant is that most of the approved lenders require you to refinance.
This is because most homeowners have low interest on their primary mortgage and refinancing will likely increase it, making them lose a lot of money over time.
Luckily, one of the newest lenders that were added to CalHFA’s list - CalCon Mortgage Inc offers the grant with a second-lien product.
This means that instead of refinancing, you get to keep the low interest for your primary mortgage and only pay the higher interest on the ADU mortgage.
Frequently asked questions
How can you use the ADU?
After the ADU is built, there is only one rule: You can’t use it as a short-term rental.
Other than that, you can use it however you like; a long-term rental, have relatives move, or even have relatives move in.
At the end of the day, the goal of CalHFA’s program is to create opportunities for more affordable housing and all of these options accomplish that.
Does the grant work with SB9 California?
No, the CalHFA ADU grant does not apply to SB9 development.
SB9 (Senate Bill 9) is a recent bill that passed in 2021. The bill allows California homeowners to add an additional residential unit into parcels zoned for single-dwelling units.
However, these dwelling units are usually much larger than ADUs and different legislation applies to them.
Will the grant money be taxed?
You will receive a 1099 for the grant money and CalHFA strongly advises you to talk to your accountant or a tax professional to learn how this might affect your yearly taxes.
Time to build your ADU
We hope that this article was helpful for you to determine whether you are eligible for the CalHFA ADU Grant Program.
If you are struggling with financing your ADU, Dwelitto can help. Learn more about ADU costs and financing options to start building your ADU as soon as possible.