If you are looking to build an ADU as a low-to-moderate-income homeowner, you are in luck. The California Housing Finance Agency (CalHFA) has created the CalHFA ADU grant that allows low-income California homeowners the opportunity to access up to $40,000 towards ADU pre-construction costs.
However, there is a catch to this grant. To qualify, you need a loan from one of their pre-approved lenders, and you must fall within a specific income range. Read on to find out if you qualify for the CalHFA ADU grant and what aspects of your ADU development you can use the money on.
What Is An ADU?
Before we dive into what the CalHFA ADU grant program is, let’s define what we mean by ADU. An ADU, also known as an accessory dwelling unit, is a small residential unit built on a single-family lot with a pre-existing primary home already on it. Essentially, they are smaller scaled homes people develop in their backyards.
An ADU is NOT a tiny home. Usually, tiny homes are mobile, and most are illegal to have in your backyard. They do not have the same rules and regulations surrounding them that ADUs do, even though they are similar in many aspects. It is important to note that they are separate because the CalHFA ADU grant does not apply to building tiny homes.
It is also important to note that an SB9 unit is not the same as an ADU either. They are often much bigger and have different legislation that applies to them. The CalHFA ADU grant does not apply to SB9 development.
Although SB9s and tiny homes are similar to ADUs, they are not the same thing and therefore are not applicable for the grant.
What Is the CalHFA ADU Grant Program?
In an effort to accelerate California’s economic recovery after the Covid-19 shut down, Governor Newsom signed the $100 Billion California Come Back Plan into legislation. This legislation is designed to address California’s biggest challenges, such as the economic hardships faced by the middle class and the growing homelessness crisis. A part of this legislative package funded a huge ADU grant program (CalHFA grant program).
The ADU grant program from CalHFA allows low-to-moderate-income homeowners access to up to $40,000 for pre-construction costs for an ADU. These homeowners must also get a loan from a pre-approved lender before they can receive the grant.
By granting low-moderate income homeowners money for ADU pre-construction costs, the grant program is encouraging ADU development to combat the growing housing crisis. The more people who build ADUs, the more affordable housing options there will be for other families since most low-moderate homeowners will likely rent out their ADUs to acquire additional income.
However, there are also many other reasons people build ADUs, which you can find here.
ADU Grant Vs. ADU Loan
The part that confuses most people about the ADU grant program is the fact that you also need a loan to apply for the grant. A loan and a grant are two different things that people often do not realize the difference between.
There are two main differences between a grant and a loan. Grants are for a specific amount of money determined by how much the department can give out and don’t have to be paid back. A loan is for how much your credit can allow and must be paid back.
The CalHFA ADU grant is only for up to $40,000 and does not have to be paid back by the recipient. However, you need a loan for your ADU construction to be eligible for the ADU grant (which is only for pre-construction costs). The loan you acquire must be from a pre-approved lender and can be for any amount that will cover the rest of your ADU development expenses. How much money you receive in the loan will be determined by your credit and ability to pay back the loaned amount.
CalHFA is best known for its loans, but not all its loans will allow you to be eligible for the grant. For example, if you get their first-time home buyer loan, that is for buying a house. It has nothing to do with building an ADU yourself. To get the ADU grant, you generally need a construction loan that is associated with remodeling or building a new unit on the property you already own.
Remember, a loan will need to be paid back over time with interest. Keep this in mind when budgeting your ADU costs.
ADU Grant Income Eligibility Limits
Before you start looking for an approved ADU loan lender, you should make sure you qualify for the grant. To qualify, the borrower (not the household) must be below the income requirement in the county they live in.
In some parts of California, borrower income can be up to $200k, with some parts being even higher. For example, at the time of this article, the lowest income limit is $159,000 for counties like Trinity and Mariposa. The highest income limit is $300,000 for counties like Santa Clara and Marin.
To determine your county’s income eligibility limit, you can click here.
Approved ADU Loan Lenders
There are several approved loan lenders you can work with to get the ADU grant, and surely more to come. Each lender has a variety of loans for you to choose from to best fit your financial needs. If you are struggling to find a loan that works for you right now, by the end of this month (June 2022), CalHFA has said that they will be opening the application up to allow for an even wider variety of loans to be used to acquire the ADU grant.
A few approved loan lenders include:
- Land Home Financial Services
- Platinum Home Mortgage Corporation
- Primary Residential Mortgage, Inc
For the full list of approved ADU loan lenders, click here and scroll down to “How to Apply.”
Different Loan Types
There are several finance options available to you from the approved lenders. Most people use a Cash-Out Refinancing loan, but other options include:
- Home equity loans & HELOCs
- Renovation loans
- Construction loans
To make securing your financing as easy as possible, you should develop a budget beforehand and have a good idea of what ADU professional you plan to work with. Knowing your time frame for the project can also help, along with if you plan to rent your unit out once it is built or not.
A quick tip for first-time ADU developers, do not try to cut costs on important aspects when budgeting your ADU. The biggest ADU mistakes people make are not including enough windows to let in natural light, not including laundry units, and skimping on the storage. Instead, cut costs in unique design elements and us standard good quality finish materials. Also, remember to budget for contingencies because very rarely do things always go as planned.
Weaknesses Of Most Loans
What deters most people from taking advantage of the ADU grant is that most of the approved loans have two major weaknesses. They often require you to refinance and already have a permit for your ADU project.
Refinancing can result in homeowners who have already locked in an excellent rate for their primary mortgage to lose that low-interest rate. As a result, they would lose a lot of money over time at the new higher interest rate in exchange for the $40,000 now. For the people who would be locking in a higher interest rate, this is most likely not worth it.
Also, you need to be working with a licensed general contractor or ADU professional with the permitting process already complete. This means that not only do you need to know where to start your ADU development, but also begin the process before you can apply for the loan.
CalCon Mortgage Loan
As we mentioned before, more new and better loans are being added to the list of approved loans. One loan that does not make you refinance your mortgage is a loan from CalCon Mortgage that takes a second position and is available across California.
Some basic details of this loan include:
- Rates are typically between 6%-8%
- There is no early payment penalty
- You must be working with a licensed General Contractor (i.e., an ADU professional; not building it yourself)
- You must borrow a minimum of $200,000 even if your project isn’t going to cost that much
- You need 25%-35% equity in your home
If you are undergoing an ADU garage conversion, building a junior ADU, or a unit that is just above the minimum ADU size limits for your jurisdiction, you may not need $200,000. These types of ADUs are often more affordable than other types. If you do not need the minimum amount this loan requires, it may not be practical for you.
If you are not interested in refinancing your home, you can always look into renting your ADU at a higher rate and paying the CalCon Mortgage loan off that way. You can also consider paying off the loan early with the money you got from the loan. The only stipulation is that you cannot pay off the loan until you have a certificate of occupancy at the end of the ADU project. The longer your project takes, the more interest you will accrue in that time, making this option less enticing for most homeowners.
How To Calculate ADU Value
When looking for an approved loan, you will need to speak with the lenders about how they calculate the value of your ADU. How they calculate value will greatly impact how much money you will qualify for in the loan. Even slight differences in calculations can have huge impacts on the amount of money you will receive for ADU construction purposes.
Many pre-approved lenders will not attribute value to the unbuilt ADU when calculating your loan-to-value ratio. Some attribute “as complete” value but do not consider future rental income. This could change as more loans and approved lenders get added to the list though.
What Are Pre-Construction Costs?
Once you acquire the loan and apply for the grant, it is important to know for what exactly you can use the grant money. Pre-construction costs include:
- Architectural designs
- Engineering plans and calculations
- Energy reports
- Impact fees
- Property survey
- Site prep
- Soil tests
Your grant money can only be used for pre-construction costs. You cannot use it for things like building materials or construction labor.
Typical ADU Costs
To get an idea of how much the $40,000 grant will save you, here is a breakdown of the four main ADU costs.
- Design And Planning: $6,000 – $14,000
- City Fees: $3,000 – $11,000
- Construction Labor and Materials: $175 – $300 / Sq. ft
- Finish Materials: $50 – $75/Sq. ft
Pre-construction costs are the first two main cost categories: Design and Planning and City Fees. These two categories can cost on average between $9,000 and $25,000. However, depending on the complexity of your design, they can cost a lot more. Having access to $40,000 to cover these costs can save you a good chunk of money since you will not have to worry about the first two main cost categories.
It is important to remember that new construction of a 499 Sq ft unit has on average construction labor and materials costs between $124,750 – $149,700, and finish material costs of around $24,950 – $37,425. This means you will still need to come up with a good chunk of money even with the grant.
Another important note is that most construction loans do not cover the first two categories, so having access to the grant helps you cover those expenses.
Learn More About ADU Grant Program
If this article did not answer all your questions, you can contact an ADU expert to help you understand which financing path will work best for you. An ADU expert can determine if you are eligible for the ADU grant and help you determine which loan opportunity will work best for your situation.
Here at Levi Design Build, we have been developing accessory dwelling units and homes for over 20 years. Our team of experts has collaborated closely with our clients to find the best financing options available for their projects and specific financing needs. That is why we have partnered with Land Home Financial to provide you with the best ADU loan options by offering:
- Cash-Out Refinancing Loans
- Chattel Loans
- Renovation Loans
As an approved lender of the CalHFA ADU Grant Program, you can work with Land Home Financial to make your ADU development more affordable.
Start Your ADU Today
If you think you are eligible for the CalHFA ADU grant but are not sure how to start your ADU, let us help! Levi Design Build offers a personalized approach to every project, starting with a free consultation. Our dedication to quality and finishing projects on time has helped us complete hundreds of successful projects and we would love to add yours to our list!
Not sure about how the ADU development process works? Check out our Free ADU Guidebook and consider taking our eCourse to learn more about the process.
Contact us today with any of your ADU questions. We are excited to be a part of your ADU development journey.