Whether it’s a granny flat, in-law suite, or cottage, all are common names for ADUs, all with the advantage of extra living space that’s sure to be the envy of every neighbor. A desirable addition with limitless uses, ADUs have become more popular in recent years. Still, for some people building an ADU can seem out of reach financially.
This is where the CalHFA grant comes in! A grant program creating housing opportunities for families all across the state, it provides funding to mitigate costs, making this project a reality to more and more homeowners. If you’re a California resident looking into building an ADU, stick around and find out how to make the CalHFA California ADU grant program work for you!
What is an ADU?
An ADU, or accessory dwelling unit, is a second housing structure that’s built on the same lot as a primary living unit. Generally, they act as a fully functional living space to include a bathroom, kitchen, rooms and the like. ADUs come in many shapes and sizes to fit the lifestyle and needs of all homeowners; There’s something to fit every existing structure!
For example, an ADU can be attached to a ground level structure like most envision when they think of a home addition. They can also be attached above a garage or upper floor. Converting a garage or creating a basement are also ADU options. Finally, you can have a completely detached ADU that offers an entirely separate structure from the original.
What is CalHFA?
CalHFA, or the California Housing Finance Agency, offers financing to California residents who fall into a lower income category. They also offer programs to the same demographic to aid in renting homes. CalHFA can also help first time home buyers navigate and secure loans and down payments.
Among their portfolio are certain grant programs, the $40,000 ADU grant program being one of them.
What is the $40K CalHFA’s ADU grant and who qualifies?
The CalHFA ADU grant is best described by CalHFA itself stating, “The ADU Grant provides up to $40,000 towards pre-development and non-recurring closing costs associated with the construction of the ADU. Predevelopment costs include site prep, architectural designs, permits, soil tests, impact fees, property survey, and energy reports.”
This grant program prides itself on $100 million in grants with a $40,000 maximum per family creating the potential for 2,500 ADUs to be financed. While the grant money is usually allocated by the end of the year, CalHFA continues to provide important information about the program making it possible for financiers to prepare grants for the following fiscal year.
As far as who qualifies, the broad answer is California residents who are classified as low to moderate income households; There are income limits for this grant. Those figures in specific are determined county by county though. For examples, see the low income limits for popular counties below:
For specific low income limits and access to the county search tool, check out the CalHFA’s eligible limits website.
How does the CalHFA’s ADU grant program work and how do I apply?
In short, there’s 5 steps to the CalFHA ADU grant program process. The entire process has been streamlined making for a seamless process from start to finish.
- Application: Homeowners will want to start by identifying approved lenders and then applying for a construction loan through one of those. They’ll then apply for the CalFHA ADU grant program via their application forms.
- Loan Approval: At this point, the homeowner will have to wait on approval of the construction loan from their lender of choice. After receiving approval the lender can then grant prequalification to the homeowner for the $40,000 ADU grant.
- Pre-Development: Any pre-development work needed on the project can start at this point, all paid through the construction loan acquired by the selected lender. The lender will now forward any invoices accrued from pre-development to CalHFA along with the original grant application.
- Grant Disbursement: When and if CalHFA approves the homeowners grant, the money will then be dispersed to the construction loan account. The amount dispersed from the CalHFA California ADU grant program will lower the total principal owed.
- Construction: Finally, it’s time to start the main construction on the ADU funded by the construction loan; The total cost of which was lowered by the ADU grant.
As far as how it works with regard to the money disbursement, you won’t just receive the funds outright. If you’re approved for the CalFHA ADU grant program, they’ll combine the money with the loan you took out to cover the remainder of the construction costs. For example, if the total cost of your project is $150,000, your loan will pay $110,000 of the project cost with the CalHFA ADU grant taking care of the remaining $40,000.
CalHFA California ADU Grant Program Pros
There’s plenty of advantages to the CalHFA California ADU grant program. Take a look at some of them below when making the decision to apply.
- No Repayment: Let’s be honest, the fact that the CalHFA ADU grant program requires no repayment is the best advantage of all. Pre-development costs can come at a hefty price depending on the type of project. The fact that you can put $40,000 of free cash toward this bottom line only gives you more to spend elsewhere.
- Increase in Property Value: This grant helps to propel your property into a higher value bracket. More space isn’t all the ADU adds; It offers a unique flex space not found in your average home. Taking advantage of the grant to complete your project means more resale value on the other end. It’s truly a win-win!
- Reasonable Qualifications: The basic qualifications for this grant are very fair. For instance, you need to be a full time employee and at least 18 years old. You need to be a U.S. citizen and resident in the state of California for at least 3 months prior to submitting an application.
- Borrowing Power: You can go into the grant process knowing that you’re going to be on the winning side of borrowing power. Secondary loans typically grant higher borrowing power so long as your credit score and finances are in order. That power combined with the $40,000 ADU grant means more than enough for project completion.
CalHFA California ADU Grant Program Cons
Before starting the application process for the CalHFA California ADU grant program, it’s important to consider these drawbacks.
- Grant Cap: This particular grant has a cap of $40,000 per household. While that’s no small number, it might not cover the majority of a larger project. Depending on the homeowners finances, it may not be an affordable project even with the granny money in hand.
- Income Limit: Depending on your financial situation and the county you reside, the CalHFA grant might not be an option for your ADU project. Even the slightest overage on dollar amount can disqualify you from the grant process.
- Specified Use: The CalHFA grant can only be used for pre-development purposes such as surveys, permits, site prep and similar construction preparation or on non-recurring closing costs. It will not cover anything outside of these parameters.
- Timeline: Since the ADU grants coincide with a construction loan and these loans have to be repaid short term, the repay timeline can be stressful. Likewise, construction on these loans have to be finished on a short timeline.
ADU Grant vs ADU Loan
When it comes to the financial aspect of funding your ADU, many people get lost in the weeds with the terminology. Simply put, an ADU grant is money toward your project that does not need to be paid back. An ADU loan on the other hand, needs to be paid back to the lender within the specified timeframe agreed upon in your loan process.
This seems easy enough but the CalHFA ADU grant leaves some scratching their heads when it states you need a loan too. The reason for the ADU loan is to cover actual construction costs for your project. Remember, the CalHFA grant only applies to pre-development costs incurred by your build. You’ll need a loan to cover the rest.
While the CalHFA grant is great, it’s best to get pre-approved from a lender for the estimated construction cost before you do anything else. The amount they are willing to loan hinges on your income, credit, and many other factors. See what you can afford by the lender’s standards prior to moving forward.
What are my loan options?
There’s several types of loans you can apply for to build your ADU. Here’s a quick rundown of the top choices:
- Construction Loan: The most common loan surrounding this topic is a construction loan. These loans usually come with a fixed interest rate, total customization in the building process, a lower monthly payment and other notable benefits. Unfortunately they do require a larger down payment and you will have to refinance once construction is complete.
- HELOCs: A home equity line of credit is another frequently used loan for ADUs and in short, means you’re using your current home’s equity as collateral for the loan. HELOCs allow you to use what you need rather than being loaned a lump sum and they often come with a low APR given that you qualify. You should consider the risk you take in using your home as collateral though, especially when it reduces the equity you’ve built in your home.
- Refinancing: Also making use of the home equity you already have, refinancing your current mortgage could help in paying for your ADU. Unlike HELOCs, you’ll acquire a lower rate and have the opportunity for a fixed rate mortgage if you’re coming from an adjusted rate loan. It’s important to remember, monthly payments could be larger depending on what you select. The upfront cost might be too much to handle for some, even though the long term savings are worth considering.
- Renovation Loan: The option for renovation loans is great for those with a smaller down payment of around 3.5% and a lower credit score (even as low as 600). Oftentimes you’re able to borrow more than other loan programs depending on what the home will appraise for upon completion. These loans can be a pain though, requiring detailed scheduling from the contractor that goes beyond the normal scope of things.
Keep in mind, this is just a shortlist of the loan options you have for your ADU financing. While less conventional, you could always take on a personal loan or even use credit cards if you have the available limits for such a project.
Who will finance an ADU loan for my CalHFA grant?
Once you decide on which loan type you want to take out, it’s time to find a lender. Not all lenders offer ADU loan programs, especially ones familiar with the CalFHA grant. Even so, there’s enough to give you the choices you need. For an exhaustive list of these lenders by county, you can use CalHFA’s approved lender search tool. Here’s some of the approved lender to get you started:
- Envoy Mortgage
- Supreme Lending
- Platinum Home Mortgage
- New American Funding
Always check with your current lender to determine if they offer ADU loans. While several of the lenders mentioned above are larger companies, it’s worth looking into local lenders and any incentives they may offer within.
Steps in Building Your ADU Using CalHFA’s Grant
Grant process aside, the steps of actually building your ADU has its own procedures. While it’s an intricate project with no lack of moving parts, the steps below give you a birds eye view of the operation.
- Acquire Contractor: One of the most important decisions you’ll make in the ADU build process is your choice in contractor. It’s important to pick someone who is known for meeting deadlines and who communicates well. Be sure they’re licensed and insured and someone who specializes in or is at least familiar with the ADU building process. Price is always on consideration as well. To ensure you’re not being taken advantage of, try getting multiple bids on the project for comparison purposes.
- Financial Review: Explained in detail in the “How Do I Apply” section above, you’ll find the steps you need to take in order to receive the CalHFA funding and how that fits into your loan. That aside, you’ll want to review your contractor’s bid, decide which financing option best fits your needs, and discuss adjusting your design if need be based on your project’s total cost.
- Feasibility Study: This study is a crucial part of the build process as it ensures your build is doable given the utilities from the main house, available lot space, local requirements, and the like. Ensuring that your space is viable for the project and meets building code will save you a huge headache in the end, avoiding possible pitfalls that are identified in the study itself.
- City Consult & Permitting: If all is well with the feasibility study, your contractor can now submit a complete set of drawings to the city. Alongside these drawings, they’ll begin working on the permitting needed for everything. Pulling these permits allows the work to be done legally and safely for all involved.
- Finalize Aesthetics: Probably the most fun step in the process is finalizing the materials used in your ADU build. Most people already have an idea of how they’d like their ADU to look both inside and out. If not, their contractor can supply them with 3D mock ups and material options from siding to flooring.
- Construction Begins: Finally, with all the nitty gritty details pegged down, your build out can officially begin! Completion times vary depending upon how big or small your project is and what customizations are being added. You can usually expect a build from beginning to end to take anywhere from 7 to 16 months.
An accessory dwelling unit can serve many purposes that are beneficial for expanding families, guests and the like. Even so, it’s no secret that finances can pose an obstacle in making this dream a reality. That’s why the CalHFA California ADU grant program is worth investigating. This grant program takes the sting off the bottom line, offering a more affordable project with the extra space many families want or even need.
Ready to get started on your accessory dwelling unit? We’re ready to assist! Get a FREE ADU consultation in the Los Angeles area! Call Structura Remodeling at 1-800-922-4613 or schedule a free consultation here:
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What is a JADU?
Similar to an ADU, a JADU or junior accessory dwelling unit, is also a housing structure built with the intent for living with one caveat: it’s no bigger than 500 square feet. As a rule of thumb, JADUs are attached to the home and because of the smaller space they don’t have the full amenities of an ADU.
For instance, you’ll find JADUs likely share a bathroom with the main living quarters, not always a separate bathroom as with ADUs. Similarly, JADUs will have some type of space for prepping food but not a full kitchen for cooking.
What is a UDU?
A UDU, or unpermitted dwelling unit, is an ADU that has not been built under proper permitting. This is often the result of a DIY with the best intentions. While it can be tempting to construct an ADU on your own, the risk is not worth the reward in this case. Using a trusted contractor like Structura Remodeling ensures everything’s done legally.
If not, you run the risk of having to revert back to legalizing your ADU which is not only a hassle, but not always doable. You’ll need to study county codes, bring the unit to standard, submit plans, undergo inspections and so forth. If you’re lucky, you can make things right, but it’s not a chance you’ll want to take.
Can the CalHFA California ADU grant program work alongside SB9 California?
The SB9 or Senate Bill 9 allows for California homeowners to build new housing structures on their single family lot by splitting the lot in half. This bill helps provide homeownership opportunities and the possibility of multigenerational living, much like ADUs tend to do.
Regardless, homes built using SB9 are considered to be entirely different projects though their structures are often similar. Generally, you’ll find SB9 builts to be larger and thus are governed by separate rules. That said, the CalHFA California ADU grant program cannot be used alongside SB9.
What if I applied for the grant after paying out of pocket for upfront costs?
Unfortunately, any upfront costs you may have paid in the pre-development phase cannot be repaid to you directly. That doesn’t mean you’re completely out of luck though! If you have proper documentation in the form of invoices and receipts you’ll likely be able to apply the unused grant balance to your loan.
This balance can go toward payment on the principal of your loan, so in an indirect way you’re still seeing the money back or at least working in your favor.
Are ADUs worth the investment?
An ADU is no small project and with it comes a price tag that may scare off some. For those who can see the long term value though, ADUs are well worth the investment. Surveys on the return on investment for these structures report an average of a 35% bump in sale value.
ROI aside, they’re worth the investment when it comes to extra space alone. They’re perfect for expanding families and a place for your out of town guests. Not to mention the possibility of using ADUs for an AirBnB site. They have endless potential!