State grants helping low-income homeowners build granny flats

Up to $25,000 is available to owners earning 80% or less than the median income.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | September 26, 2021

Steamrolling cities into making it faster and easier to add accessory dwelling units, or granny flats, to residential properties seemed like a great idea to reduce California’s housing shortage.

Now, Gov. Gavin Newsom and California lawmakers are doubling their hell-bent-for-ADU solution to the state’s housing crisis, offering all lower-income homeowners grants of up to $25,000 for ADU development costs as part of their cash-out refinance mortgage or construction loan for an ADU.

The grants are limited to homeowners earning 80% or less of the area median income.

“The goal is to increase housing units,” said Eric Johnson, a spokesperson at the California Housing Finance Agency. “The main unit must be owner-occupied.”

There are no claw-backs or restrictions on the homeowner once all the work is done. The homeowner could sell the property immediately, according to Johnson.

U.S. citizens and legal residents are eligible for these grants.

Southern California ADUs have an average size of 600 to 800 square feet and cost $300 to $375 per square foot to build, according to Craig Dillon, president of SoCal Casitas & ADU. Preconstruction costs like architectural designs, permits, soil tests, engineering and energy reports run from $12,000 to $15,000, said Dillon.

The refinance and/or construction lender must certify the construction of the ADU will follow Fannie Mae/FHA ADU feature requirements.

Things might get tricky when it comes to income and property qualifying for this grant. For example, Fannie Mae’s Homestyle allows a mortgage for up to 97% of the projected appraised value so long as the loan does not exceed $548,250. Fannie allows a mortgage for up to 95% of the estimated completed value on loan amounts of $548,251 to $822,375 in Los Angeles and Orange counties.

You will need like-for-like comparable sales to justify the new value, according to Lance Siegel, president of HVCC Appraisal Ordering Service. In other words, there needs to be other recently sold comparable properties with ADUs to use as comps.

The next challenge is the 80% area median income cap. For example, Los Angeles ZIP code 90062 puts that area median income cap at $68,880 (or $5,740 per month), according to Fannie Mae’s website.

You’d be close to the qualifying limit with a $500,000 total mortgage. This new mortgage must include the refinance of any existing mortgage.

Let’s assume your current mortgage balance is $279,500, and it will cost $220,500 to build an ADU, after deducting a $14,000 ADU preconstruction grant. The principal, interest, taxes, and insurance would be $2,536, assuming property taxes of $312 per month and homeowner’s insurance of $150 per month.

Dividing that by the monthly income cap of $5,740 brings you to a debt-to-income ratio of 44.2%. Can you say topping out?

Regardless of the completed property value, a $500,000 loan doesn’t leave much room for most Los Angeles County mortgagors to finance the ADU and still stay under the income qualifying limits.

Are the ADU preconstruction grants ripe for fraud? Let’s see now. For free, eligible borrowers can get $25,000 when the true cost of the preconstruction work might be $14,000. Padding the preconstruction cost by the extra $11,000 and either splitting it with the contractor or getting a construction price discount by that same amount is a real possibility.

I also wonder whether this is an adequate solution to California’s housing crisis.

On the one hand, ADU construction increased dramatically in 2017-18 after the first round of laws passed making ADUs easier to build.

But ADU construction leveled off statewide in 2020, and fell 18% in populous Los Angeles County, after enactment of the latest round of faster and easier state ADU mandates, according to the California Department of Housing and Community Development. A total of 12,569 ADU permits were issued in California in 2020, compared with 12,437 permits issued in 2019. We are talking a whopping 1% increase in ADU permit growth. Oy vey.

ADUs and the recently signed Senate Bill 9, which largely eliminates single-family zoning, are not good answers. Most residential lots around the state are not well oriented for ADUs, much less multiple units.

Is this California’s big idea for solving the housing crisis? It’s more like taking a slow boat to China. We’re never going to get there.

Freddie Mac rate news: The 30-year fixed rate averaged 2.88%, 2 basis points higher than last week. The 15-year fixed rate averaged 2.15%, 3 basis points higher than last week.

The Mortgage Bankers Association reported a 4.9% increase in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $548,250 loan, last year’s payment was $6 less than this week’s payment of $2,276.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 2.25%, a 15-year conventional at 2.125%, a 30-year conventional at 2.75%, a 15-year conventional high-balance ($548,251 to $822,375) at 2.25%, a 30-year conventional high-balance at 2.99% and a 30-year fixed jumbo at 3.25%.

Eye catcher loan of the week: A 15-year fixed rate at 2.375% without cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.