The Innovation Fund Act creates a new federal grant program designed to reward cities and towns that are successfully building more housing. Here's how it works: The federal government will give out grants of between $250,000 and $10 million each year to local governments that have demonstrated they're actually increasing their housing supply. To qualify, a community needs to show it's grown its housing stock and can prove this through data from the past three years.

The money can be used for a variety of housing-related projects and initiatives. Communities can use grants for infrastructure improvements, transportation projects, or to help match funds for water and sewage programs. More importantly, they can use the money to support local efforts that make it easier and cheaper to build housing—things like removing parking requirements, allowing duplexes and apartment buildings in single-family neighborhoods, streamlining building permits, allowing accessory dwelling units (like backyard cottages), or reducing zoning restrictions that artificially limit housing density.

The bill specifically targets "attainable housing," meaning homes affordable to people earning between 60-120% of their area's median income, depending on the community's approach. The federal government will award at least 25 grants per year, with preference given to communities that have used innovative policies to increase housing and shown strong results. The program is funded with $200 million annually from 2027 through 2031. Importantly, the federal government cannot force local communities to change their zoning laws—this program incentivizes change through grants rather than mandates.