@lauramari_s
Read here
https://www.hppcares.org/adu/adu-grant-old.php
and here
https://hppcares.org/adu/adu-grant.php
I believe the entire $40k is taxable to you.
The web site is a bit confusing, at one point they say their fee is $2500, but at another point they say their fees are $650 and $1350 and there is a $2500 holdback. In either case, the entire award is taxable to you. The holdback comes back to you in the end, either to pay a substitute contractor or to pay down your bank loan if there is money left over at the end of the grant. If you paid a $2000 or $2500 application fee to a regular lender, that would not be deductible or excludable from income, so it's not excludable now.
Separately, HPPCares claims that since they are a 501c3, the $2500 or $2000 application fee is a tax-deductible donation their charity. I am somewhat dubious about this because you if you make a donation, you have to reduce it by the value of the goods or services you receive, and since they talk about how other grantmakers charge $7000 closing costs and they only charge $2500, I don't think you can really count the $2500 as a donation that exceeded the value of services you received. (I find it a bit odd that they would be bragging about their business ethics in home improvement, but seemingly get this aspect of charitable donations completely wrong. But I digress.)
In any event, from what I can tell of the program, the entire $40,000 is taxable to you. The deductions either directly benefit you, or would be things you would have had to pay for separately.
