Rent to Low-Income Tenants and Bag $100K: OC’s New ADU Loan Program
When California Gov. Gavin Newsom inked Assembly Bill 1033 into law, he didn’t just add a signature; he changed the game for housing in the Golden State. The law now allows homeowners to sell their accessory dwelling units (ADUs) separately from their primary residences, effectively turning them into individual condos. So, how can you, as a homeowner, take advantage of this revolutionary change?
The Game-Changing Orange County Housing Finance Trust
First up on my recommended list of financial resources is the Orange County Housing Finance Trust (OCHFT). This nonprofit rolled out a program exclusively for Orange County homeowners on October 24, offering construction loans of up to $100,000. The sweetest part? No monthly or interim payments are required; instead, you’ll make a balloon payment two decades later.
The Catch? Rent to the Economically Disadvantaged
However, there’s a string attached. To qualify, you must rent your ADU to tenants who fall within the very low-income bracket for the first 10 years. Stick to these rules, and the trust promises you could see almost half—48%, to be exact—of your loan forgiven if the original amount was $100,000.
Bye-Bye Traditional Mortgage Qualifications
Amanda Grill, the compliance manager at OCHFT, assures there is no formal mortgage qualifying process. “There’s no income evaluation,” she says. OCHFT was established in 2019 with a mission to assist the homeless and the economically disadvantaged. It operates more like a “government bank,” approving applications for funding without advising on loan qualifications, according to Adam Eliason, Trust Manager at OC HFT.
Navigating Interest Rates
The trust offers an accruing interest rate between zero to 3%. If you rent to a tenant with a Section 8 voucher, you’re looking at a 0% interest rate. But if the tenant falls outside the low-income parameters, the rate can hike up to 3%. Homeowners are required to provide lease information to the trust, which conducts annual audits to verify compliance.
Examples of Ideal Tenants
OCHFT’s brochure suggests your tenant could be a parent, a child, a new neighbor, an old friend, or a voucher-holder. Simply put, if you’re aiming for this near-free funding, renting to a very low-income tenant is your best bet.
The Real Cost of Constructing an ADU
Even with the generous $100,000 from OCHFT, building an ADU from scratch will likely cost more. “Construction costs range from $350 to $400 per square foot,” warns Mark Lefitz, vice president of business development at EZ Plans. A 1,000-square-foot ADU could thus cost around $400,000, meaning you may need to combine different financing sources like savings, home equity lines of credit, or even tapping into the bank of mom and dad.
Additional Financing Options
Apart from OCHFT, other financing programs like the FHA 203(k), Fannie Mae Homestyle, Freddie Mac Choice Renovation, and USDA Renovation also offer funds for ADU construction.
The VA Loan Conundrum
The Veterans Administration is still evaluating the implications of the new bill and has yet to finalize its position on ADU loans.
A Word for Those Struggling with Financing
If you’re finding it hard to secure a traditional loan, private lenders may be your best bet. Sandy MacDougall, CEO and founder of Mortgage Vintage, suggests hard money loans as an alternative, which can be easier to qualify for.
The Legal Maze of Condo Conversion
If you’re considering turning your ADU into a separate condo, you’ll need to navigate a labyrinth of legal and financial requirements. It’s advisable to consult a real estate attorney to ensure you’re on solid ground.
Next Steps
In my next column, I’ll delve into California’s lot-splitting laws, crucial if you’re planning to sell your ADU separately.
There you have it, Orange County homeowners! Now’s the time to think big, plan smart, and build your ADU—with a little help from some generous funding options.
