ADU Grant Program: How to Secure Funding

The ADU Grant Program is designed for homeowners looking to build accessory dwelling units (ADUs) on their properties. While ADUs offer several benefits, they can be quite expensive to build, even though they are smaller than a full-size house. 

Luckily, an ADU grant provides homeowners like you with the funds needed to create additional living spaces for family members, guests, renters, or even for personal use.

To help you understand how to secure funding for your ADU project through grant programs, this RenoFi guide will cover where to find these grants, what it takes to qualify, how to apply, and everything you need to know to successfully get approved for an ADU grant.

Overview of ADU Grant Programs

Some states, such as California, offer various ADU-specific or similar grant programs to encourage and support homeowners in building accessory dwelling units on their properties. Although ADU grant programs or incentives go by different names in different states, they share one primary goal: to tackle housing shortages.

The Goal of ADU Grant Programs

• Increase Housing Availability: More ADUs mean more housing options in communities. This can make it easier for people to find affordable places to live.
• Support Homeowners: Building an ADU can be expensive, and some homeowners may not qualify for traditional loans due to the strict requirements. Grant programs provide the financial help they need to get started and complete their projects.
• Promote Affordable Housing: These programs help to keep housing costs down by making it easier for homeowners to build accessory dwelling units. ADUs usually provide more affordable rental options compared to traditional housing.
• Boost Community Development: Adding ADUs can boost property values, which is great for neighborhoods. It also offers more housing options.

How to Apply for the ADU Grant Program

1. Check if You Qualify. First, you’ll need to make sure you qualify. That means you meet all the eligibility requirements we covered in the previous section.

2. Gather Required Documents. If you meet the eligibility requirements, you’ll need to gather the necessary documents to complete your application. You’ll need the following documents:

   • Proof of income
   • Tax returns from the previous year
   • Utility bills (electricity, gas, water)
   • Details on your planned ADU project

3. Submit the Application. When you’ve got all your documents ready, you can submit the completed application through your lender. They’ll review everything and verify you qualify.

4. Work with a Preferred Lender. The ADU Grant Program requires that interested homeowners must work with a CalHFA pre-approved lender. Alternatively, you can work with a special financing grant program participant. A lender will help you submit your grant application and handle the funding.

5. Receive Grant Approval. If you get approved, you can receive up to $40,000 in grant money to cover pre-development costs and closing costs for your ADU. The best part is that you don’t have to pay it back, although you may owe taxes on the funds.

6. Begin Construction. With the grant secured, you’re ready to start construction. Your lender and the program administrators will work closely with you and your builder throughout the process.

Which States Offer ADU-Specific Grant Programs?

There aren’t many states with statewide ADU grant programs, but a couple of states across the U.S. have implemented programs specifically designed to support the construction of accessory dwelling units. These include:

California

California offers the ADU Grant Program run by the California Housing Finance Agency (CalHFA). If you qualify, you could get up to $40,000 to help cover the costs of planning and setting up your ADU project.

The grant money can be used for pre-development expenses and non-recurring closing costs. This includes things like architectural designs, permits, and other upfront costs that often make starting an ADU project challenging.

If you’re a California homeowner considering building an ADU, this grant could significantly reduce your initial out-of-pocket expenses and help make your project a reality.

Vermont

The state of Vermont has a grant program for ADUs called the Vermont Housing Improvement Program (VHIP). This program offers grants of up to $50,000 per unit to qualified homeowners looking to build ADUs on their properties. There’s a condition, though: you need to agree to rent out the ADU at or below fair market rates for at least 5 years.

New York

New York has a grant program called the Plus One ADU Program. The state gives the grant money to nonprofits or local governments, which then distribute the funds to homeowners who qualify. If your income is on the lower to middle side, you could get up to $125,000 to either construct a brand new ADU or fix up an existing one to meet all the local and state codes and regulations. The state has set aside a whopping $85 million over the next 5 years to fund this initiative.

Other Cities

A few other cities also offer ADU incentive programs, including:

• Portland, Oregon: Portland waives development fees for homeowners who want to build an ADU on their property. This cuts down on upfront construction costs and makes ADU projects more doable for Portland residents.
• Santa Cruz, California: Santa Cruz offers forgivable loans of up to $40,000 and fee waivers. The loans help cover construction costs, and the fee waivers reduce the financial burden for homeowners building ADUs in the city.
• Montpelier, Vermont: Vermont’s capital city helps with ADU development through grants of up to $20,000 and 0% interest loans. The grants provide direct funding to help homeowners start and complete their ADU projects, while the no-interest loans offer an affordable way to finance ADU projects.
• Boston, Massachusetts: Boston’s citywide ADU program gives homeowners the chance to get deferred equity loans of up to $30,000 to help make their ADU projects happen.
• Austin, Texas: The Alley Flat Initiative in Austin offers faster permitting, waivers on permitting fees, and reduced professional fees for homeowners who meet certain requirements.
• Seattle, Washington: Seattle’s “The Block Project” is using ADUs to tackle homelessness. They’re building sustainable homes in people’s backyards and providing housing plus support services to those in need.

How to Qualify for the ADU Grant Program

The rules for qualifying for ADU grant and incentive programs can differ across different states and cities that offer them. However, this RenoFi guide mainly covers the requirements for California’s ADU Grant Program since it’s one of the biggest statewide initiatives out there.

To qualify for the California ADU Grant Program, you need to meet the following eligibility requirements as a homeowner:

Property Requirements

• The home must be a single-family or duplex located in California
• You need to have been living there for at least 6 months before applying
• The property can’t be in a high fire risk area

Homeowner Requirements

• You will need to have a minimum credit score of 640
• Your household income must not exceed 150% of the area median income (AMI) for the county where your property is located
• You cannot have any outstanding judgments, tax liens, or delinquent child support payments

ADU Requirements

• The ADU must be a new construction, conversion, or addition to an existing home
• The ADU must be a complete living space with a kitchen, bathroom, and living/sleeping area
• The ADU must comply with all applicable zoning and building codes

Accessing the ADU Grant Funds

To actually receive funding through the ADU Grant Program, you’ll first need to take out a construction or renovation loan from a CalHFA pre-approved lender. The lender will submit your information to the program administrators after your loan is approved.

If you are approved for the grant, the program will provide $40,000 in additional funds that will be added to your existing construction loan.

What Do the Grant Funds Cover?

The ADU Grant money can be used to cover some of the key upfront costs of building an accessory dwelling unit. Here is a rundown of what the grant money can be used for:

• Permits: Before you start building your ADU, you’ll need to get all the right permits from your local authorities. The grant can cover the fees and paperwork involved in this process.
• Inspections: In addition to permits, you’ll also have to pay for various inspections throughout the construction. The grant funds can be applied toward those inspection fees as well.
• Site Preparation: Preparing the construction site is another big expense. The grant money can go toward site prep activities such as demolition, excavation, and laying the foundation for your new ADU.
• Architectural Drawings: You’ll need professional architectural drawings to make sure your ADU meets all the building codes. The grant can help pay for an architect or draftsperson to create those plans.
• Project Design: In addition to the technical drawings, the grant can also cover the costs of working with a designer. They can help you figure out the layout, finishes, and features you want in your new living space.
• Cost Estimates: It’s important to put together an accurate budget when planning on building an accessory dwelling unit. The grant money can be used to hire a contractor or estimator to provide a detailed cost breakdown, professional estimates, and feasibility studies for the full ADU construction project.

Alternatives for Funding ADU Projects

As laudable as the ADU Grant Program in California is, it is currently unavailable. The $25 million allocated has been exhausted within days at the start of 2024. For this reason, the program is currently paused and not accepting new applications.

That said, there is a high likelihood the program will be refunded and reopened for new applications soon, considering the state’s ongoing housing shortage.

While the CalHFA ADU Grant is temporarily unavailable, there are other financing options available to help make your ADU project a reality. Here are some common alternatives you might want to consider to finance your ADU:

• Renovation Loan: With a renovation loan, you can roll the purchase price and renovation costs into one loan. The interest rates are usually lower than personal loans, which is a plus. The downside is you may need to put down a bigger down payment and have stricter credit requirements compared to a standard mortgage. 
• Construction Loan: A construction loan provides funding specifically for the building phase of your ADU project. The best part is you usually make interest-only payments on the amount of money that has been disbursed during the construction phase. This means you don’t start repaying the principal loan amount until construction is completed. However, once construction is done, you have to refinance into a permanent mortgage, which can add some extra costs and paperwork to the process.
• Cash-Out Refinance: This lets you tap into your home’s equity to cover the ADU costs. The interest rates are often lower than other loan options. The disadvantage is that it extends the length of your overall mortgage and could increase your monthly payments.
• Home Equity Loan: With a home equity loan, you get a lump sum of cash at a fixed interest rate and a set repayment schedule. The downside is your home is used as collateral, so you could potentially lose it if you fall behind on the payments.
• Home Equity Line of Credit (HELOC): A HELOC gives you a revolving line of credit that you can draw from as needed. The interest rates tend to go up and down over time, which can make it difficult to plan your monthly budget. Like a home equity loan, your home secures the HELOC, so there’s a risk of foreclosure if you default.

RenoFi is another alternative to fund your ADU project and here’s why it may be of interest. ADUs not only increase your home’s value after renovation (e.g. once the ADU has been built) but can also generate rental income. However, ADUs are costly. If you don’t have enough equity in your current home, funding ADU construction with a home equity loan is impossible.

For example, let’s say your current home value is $500,000, and your outstanding mortgage balance is $400,000. You are planning on adding an ADU and expect the value of your home to increase to $640,000. Your current loan-to-value ratio (LTV) is already at 80%, which means that most home equity loans are out of reach because that’s the maximum LTV they allow. So, your borrowing power using your current equity is $0.

RenoFi, on the other hand, would allow you to go as high as 150% LTV of your current value or 90% of your after renovation value, whichever is lower. So, in this example, while using a standard home equity loan results in your borrowing power being $0, a RenoFi loan allows you to borrow up to $176,000 by using the after renovation value of your home!

Get started with your RenoFi loan here

Conclusion

Building an ADU is a great investment, but it can be pricey. Funding programs like the ADU Grant Program offer funds to help cover some upfront costs and make construction more affordable.

If grants aren’t available, don’t worry! RenoFi has other financing solutions to keep your project moving. Contact us today to find the best loan for your ADU project.

RenoFi loans are the smartest way to finance a home renovation project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the after renovation value of your home. This allows you to borrow, on average, 11x more, get a low monthly payment, and keep your low rate on your first mortgage.