Building an ADU in California can be an expensive undertaking. We at Revival Homes estimate that in the Los Angeles area, a simple garage conversion can cost between $100,000 and $140,000, and that a detached new one-bedroom ADU can cost between $225,000 and $300,000. That’s a hefty chunk of change, and most people use a home loan to pay for construction.
Fortunately, California recently launched a grant program that can put real money in your pocket if you’re planning on building an ADU. There have been recent changes to the program that have made more people eligible for the grant than ever. Here’s what you need to know:
What’s the CalHFA ADU Grant Program?
The California Housing Finance Agency (CalHFA) is an agency of the state government that provides low-cost home financing to first-time and lower-income homeowners. Earlier this year, the state passed a budget that included $100 million in grants to help homeowners finance ADU construction.
CalHFA created the ADU Grant Program to pay out the grant money to eligible homeowners. The grant provides up to $40,000 per homeowner to help offset some of the costs of the typical ADU project.
Since the $40,000 is a grant, not a loan, homeowners never have to pay it back.
Who is eligible for the grant?
Homeowners who qualify as having a low or moderate income are eligible for the grant. The definition is quite generous: in Los Angeles County, a homeowner may earn up to $180,000 per year and be eligible, and in Orange County, a homeowner may earn up to $235,000 per year.
Here’s a full list of the maximum allowable income in each county:
Additionally, you have to be living in the home (you’ll have to sign an affidavit certifying that you occupy the property), and continue living there during construction. Both single-family and multifamily homes (like a duplex) qualify.
Investment properties and homes that are owned by an LLC aren’t eligible. After the ADU is completed, it can be used for any purpose except for short-term rentals or Airbnb.
What can I use the grant money for?
You’re allowed to use the grant money to pay for pre-development (“soft”) costs. This can include site prep, a survey of the property, architectural designs, soil tests, structural engineering and energy reports, and permitting fees. If you decide to take out a loan to finance the ADU, you’re also allowed to use the grant money to reduce the interest rate on your loan (also called “buying down points”).
You’re not allowed to use the grant money to pay for the “hard” costs of construction — essentially, building materials and labor.
How do I get the grant money?
Until recently, to get the grant, the homeowner would have to get a loan through one of CalHFA’s partner lenders (“ADU Grant Program Lenders”), and the partner lender would pay out the grant money. These partner lenders typically only offer renovation or construction loans, which are slow to close and require the borrower to refinance the primary mortgage on the house. Since many homeowners have locked in low rates on their primary mortgage, and interest rates are rising, most people don’t want to take out a renovation or construction loan. This limited the effectiveness of the grant program.
Fortunately, the program now allows you to access the grant money regardless of your source of funds. You can get a loan through any lender on your own, you can get a loan from one of CalHFA’s partner lenders, or you can use your own cash savings or retirement account instead of a loan. This means that you can use a home equity loan or line of credit to pay for construction, which doesn’t require you to refinance your primary mortgage.
If you decide to get a loan on your own, or to use your own savings, you’ll need to work with a CalHFA-approved nonprofit or city government’s ADU program (called a “Special Financing Grant Program Participant”) to manage the funds. The Program Participant will ensure that you qualify for the grant, access the grant money, and put it in a third-party escrow account, along with your loan or cash savings. Once your project starts, this escrow account will then be used to make payments to your architect and general contractor as project milestones are met.
The California Community Economic Development Association and HPP Cares are nonprofit organizations that serve as Program Participants, and you can apply for the grant through their websites. A full list of Program Participants can be found on the CalHFA website. We can also get you in touch with a Program Participant directly if you prefer.
Will the grant affect my taxes?
The grant likely will count towards your taxable income, and CalHFA will give you a 1099 form for the grant money. So you should expect to pay income taxes on the grant.
How Revival Homes can help
We’re here to support you at every stage of your ADU project. If you have additional questions about ADUs and property taxes, or want to discuss your ADU project with an expert, feel free to book a free consultation with us.