Section 3: Using HOME and CDBG for Homeownership

Using HOME and CDBG for Homeownership

This section reviews how HOME and CDBG can be used to assist homebuyers. It begins with a discussion of the range of approaches to creating affordable homeowner units with CDBG and HOME funds. Then it discusses development and financing rules related to homeownership. Next the section covers the on-going responsibilities related to assisting homebuyers. The section concludes with case studies that illustrate how CDBG and HOME can be used together to create homebuyer housing.

Approaches to Creating Homebuyer Units

Homebuyer programs can be structured in any number of ways to encourage the acquisition, acquisition and rehabilitation, or the new construction of affordable homes. In general, there are two major types of approaches to creating homebuyer units:

• Development approach: Under this approach the jurisdiction subsidizes the creation (through rehabilitation or new construction) of affordable homebuyer units. These units are then sold to eligible homebuyers.
• Homebuyer subsidy approach: Under this approach, the jurisdiction provides a direct subsidy to the homebuyer to help him or her afford the new home.

These two approaches can also be used together in order to lower the cost of developing homebuyer housing, and to assist individual families to purchase the home.

Development Approaches

Under the development approach to homeownership assistance, the jurisdiction funds a nonprofit or for-profit developer of the housing. The developer purchases the site and develops the units. These units are then sold, usually at below market prices, to low-income buyers. In some instances the jurisdiction directly develops the housing, but this is not typical. Options for the development of housing include:

• New construction of units;
• Acquisition with rehabilitation; and
• Development of subdivisions (which may include new construction and/or rehabilitation).

New Construction. Under this option, the developer builds new units and then sells these units to low-income homebuyers. The units may be built scattered site (at infill or other locations) or they may be built as a neighborhood.

For new construction, HOME can be used to pay for costs that are necessary:

• Acquisition of the land;
• Construction costs for the new units;
• Demolition of existing structures; and
• Making utility connections including off-site connections from the property line to the adjacent street.

Every HOME-assisted unit must be occupied by a low-income homebuyer. For the purposes of determining the affordability period, it is important to look at the way in which the homeownership assistance is provided. When HOME provides assistance to a developer for construction and related costs and the property is sold to the buyer at fair market value, the unit is assisted, not the buyer. This is known as a “development subsidy.” When the property is developed using HOME funds and is sold to a buyer at an amount below the fair market value, the buyer is considered assisted and the affordability period is based upon the difference between the fair market value and the sales price, assuming that there was no other assistance provided to the homebuyer. This is known as “direct homebuyer assistance.” The financing structure of the homebuyer’s assistance has further implications for the obligations during the period of affordability, which are discussed in detail the “Ongoing Requirements” section of this section.

CDBG funds, on the other hand, cannot be used to finance the new construction of housing unless it is undertaken by a CBDO as part of a neighborhood revitalization, community economic development, or energy conservation project. CDBG can, however, be used for acquisition of the land, if the acquisition is conducted by the grantee, a public agency or a nonprofit. It can also be used for demolition and clearance.

Acquisition/Rehabilitation. Under this option, the developer acquires existing property and renovates that property. The unit is then sold to an eligible homebuyer, typically at below market prices.

Both HOME and CDBG can be used to acquire existing units, rehabilitate them, and resell them to eligible homebuyers. While this activity is eligible under both programs, it is important to note that acquired units that are rehabilitated with HOME funds must meet the HOME minimum property standard requirements.

Unlike HOME, CDBG does not prescribe a set of property standards that rehabilitated structures must meet when assisted with program funds. HUD recommends that CDBG grantees establish written property standards for units assisted with CDBG funds.

Example: Acquisition and Rehabilitation Turnkey Program

The City of Big Lake wants to encourage homeownership within its community and it wants to see a number of its dilapidated and boarded up homes renovated and occupied.

So, Big Lake funds a CHDO to undertake a turnkey program. The CHDO acquires and rehabilitates substandard units using HOME funds. These units are then sold at $10,000 below market to eligible low-income homebuyers.

Development of Subdivisions and Neighborhoods. Under this option, the developer purchases a large tract of land and uses that land to develop an entire neighborhood or subdivision. The homes that are built in this neighborhood are sold to eligible homebuyers.

CDBG can be used to undertake a wide variety of activities related to targeted neighborhood development. In addition to acquisition, rehabilitation, and infrastructure, CDBG can be used for related activities such as public services or economic development. The CDBG program provides grantees with regulatory flexibility when using program funds to

develop larger-scale neighborhood revitalization activities within areas designated as neighborhood revitalization areas (NRSAs) or community revitalization strategy areas (CRSAs) under the State CDBG Program. Note, however, that this flexibility does not remove the general prohibition on new construction under the CDBG Program.

While the HOME Program does not include special provisions for PJs developing new neighborhoods or subdivisions, costs related to the development of the housing unit(s) are eligible, including on-site infrastructure and off-site utility hook-ups. Note, a subdivision that is developed under common ownership, management, and financing is considered a single project under HOME. Therefore, a substantial amount of infrastructure, including new roads, sidewalks, and utilities, are considered “on-site” in a subdivision that is developed as one project. These costs are eligible, but would be subject to the maximum per unit subsidies. Additional discussion about how HOME and CDBG can be used for neighborhood revitalization activities is provided in Section 5.

Example: Homebuyer Neighborhood Development Friendsville had a neighborhood that needed to be revitalized. Units were in poor repair and it had a highly transient population. Friendsville wanted to redevelop the neighborhood using a New Urbanism approach with community focused design. Friendsville owned a large parcel in the middle of this neighborhood. It donated this land to a nonprofit that worked with an architect to layout streets and build homes. These homes were then sold to mixed-income homebuyers. Units that were to be sold to low-income buyers were constructed partially with HOME funds.

Direct Homebuyer Subsidy Approach

There are a number of ways that the HOME and CDBG Programs can be used to directly address homebuyer needs. These include:

• Providing downpayment and closing cost assistance;
• Assisting homebuyers to finance the purchase of the home;
• Establishing individual development accounts to buy a home; and

• Developing lease purchase programs.

The American Dream Downpayment Initiative (ADDI) is a new source of funds to provide direct assistance to low-income homebuyers. Enacted in December, 2003, and administered by the HOME Program, ADDI aims to increase the homeownership rate, especially among lower income and minority households, and to revitalize and stabilize communities. ADDI will help first-time homebuyers with the biggest hurdle to homeownership: downpayment and closing costs. The program was created to assist low-income first-time homebuyers in purchasing single family homes by providing funds for downpayment, closing costs, and rehabilitation carried out in conjunction with the assisted home purchase.

For a comparison of the HOME and ADDI homebuyer assistance requirements, see Appendix 3-1. For more information on ADDI, visit the Office of Affordable Housing Programs’ website at https://www.hud.gov/offices/cpd/affordablehousing/programs/home/ addi/index.cfm. or at www.hud.gov/addi/

 

Downpayment and Closing Cost Assistance. One of the most common methods for assisting low- and moderate-income households to purchase a home is the provision of downpayment and closing cost assistance. Low- and moderate-income households that are able to afford the monthly cost of homeownership (i.e., mortgage and insurance), are not always able to come up with sufficient funds for the lender’s required downpayment and/or the various up-front fees and charges that are collectively called “closing costs.” Both HOME and CDBG allow for the provision of downpayment and closing cost assistance to eligible homebuyers.

Under the HOME Program, the provision of downpayment and closing cost assistance to qualified low-income buyers is considered an eligible homebuyer activity. This type of assistance is considered direct assistance to acquire a property.

Homebuyer assistance may be conducted under two different CDBG eligible activities: public services and direct homeownership assistance under 570.201(n). If the grantee chooses to fund activities under the public services category, they are subject to the grantee’s overall 15 percent public services cap. Direct homeownership assistance under 570.201(n) is not subject to this cap, but grantees may only pay up to 50 percent of the required downpayment amount. All assisted households must be low- and moderate-income under either eligible activity, if the LMI housing national objective is used.

Homebuyer Financing. Another form of direct assistance to homebuyers is the provision of some or all of the financing that enables them to purchase their home. The jurisdiction can act as a lender or subsidize the financing offered by the private lender. When jurisdictions act as a lender, a number of loan forms are possible including:

• Grants or deferred, forgivable loans;
• Amortizing first position loans;
• Amortizing second position loans (subordinate to a private lender); and
• Deferred payment loans.

Example: Deferred Payment Loans

The City of Spruceville wants to assist low-income homebuyers to purchase units. It studied its waiting lists and found that most low-income buyers simply did not have the income to fully afford a private loan covering the purchase price of a modest unit.

So, Spruceville designed a deferred payment loan program. Under this program, the City lends low-income borrowers up to $20,000 in HOME funds as a second position loan behind the private financing. This means that households can reduce the amount they needed to borrow from the private lender and thereby reducing their monthly payments. The loan is not amortizing and is not due until and unless the homebuyer sells his or her home. At the time of sale a pro-rata share of the funds will be due back, depending upon how long the homebuyer has remained in the unit.

When jurisdictions want to encourage a private lender to make a loan to a low-income family or they want to make that loan more affordable, they may use a tool such as:

• Interest rate write-downs;
• Principal write-downs; and
• Loan guarantees (under HOME).

Both CDBG and HOME can be used for most forms of direct homebuyer assistance, including:

• Subsidizing interest rates and mortgage principal amounts, including making grants to reduce the effective interest rate on the amount needed by the purchaser to an affordable level. (Funds granted would have to be applied to the purchase price.)
• Subordinating direct loans toward the purchase price, at little or no interest, so that the total mortgage will be affordable to the purchaser.
• Under CDBG, paying all or part of the premium (on behalf of the purchaser) for the mortgage insurance required up-front by a private mortgagee. (This would include private mortgage insurance (PMI).) Note, subsequent payments of this premium would not be permitted.

See the section below on development and financing requirements for more detail on methods of structuring financing.

It is important to note a key distinction between the development approach and the homebuyer financing approach when it comes to new construction. In a CDBG rule dated November 21, 2000, HUD clarified that the prohibition on new construction under CDBG does not apply to new units purchased by individual homebuyers. Individuals may use CDBG assistance to buy newly-constructed homes. However, unless they are a CBDO, developers are still prohibited from building new homes with CDBG funds.

Individual Development Account Programs. Individual development accounts (IDAs) are dedicated savings accounts that provide start-up funds to assist low-income residents:

• To start a business; or
• To purchase a home.

IDAs are typically managed by a community organization and savings by the participating household are often matched by foundation grants, employer contributions, or other funds. The participating household is often required to participate in counseling or classes to learn how to manage its finances more effectively.

HOME and CDBG funds can be used to support IDA programs. HOME funds can be used to assist IDAs that are established for the solely for homeownership assistance purposes only, CDBG funds may be used to assist IDAs for both eligible purposes.

Specifically, HOME Program funds may be used as a source of matching funds to an IDA when the objective is purchasing a home and the account holder is income eligible. PJs may choose to use their HOME funds to support IDAs that provide downpayment and/or closing cost assistance. For further guidance on using HOME to support homebuyer IDAs, refer to HOMEfires, Volume 1, Number 8. This is available online at: www.hud.gov/offices/cpd/affordablehousing/library/homefires/volumes/vol1no8.cfm.

The use of grant funds in an IDA program would assist purchasers and be eligible under CDBG as homeownership assistance under 24 CFR 570.201(n) or the statute at 105(a)(24), which makes homeownership assistance eligible. Generally, the activity will need to meet the low- and moderate-income housing national objective, which means that each assisted household must be low- or moderate-income.

CDBG funds may be deposited in an IDA to capitalize the account or as matching deposits over the course of the household’s participation in the program (see notice CPD 01-12). If the individual does not complete the requirements of the IDA program, the CDBG funds must be returned to the grantee and any interest earned returned to the U.S. Treasury.

When HOME funds are used in conjunction with IDA programs, HOME may be committed to the account holder during the course of the household’s participation in the program but may not actually be provided until the participating household is ready to purchase a home. This is due to the statutory requirement that funds drawn down from the U.S. Treasury be invested in affordable housing within 15 days of drawdown.

Example: Individual Development Accounts

The City of Falls Point has a special program designed to assist low-income community members to obtain an education and get a job. As a part of this effort, the City offers life skills classes focused on budgeting and savings.

The City saw a real need to assist program graduates to become homebuyers. While these families usually had jobs upon graduation from the program, they did not have sufficient savings to buy a home.

So, the City started an IDA program where it used HOME funds to match family deposits into an IDA. When the family reached one-half of the amount needed for a downpayment, HOME provided matching funds to cover the other one-half.

Lease Purchase. An alternative to more traditional homebuyer assistance programs is lease-purchase. Lease-purchase programs assist eligible households that currently lease their homes to save for the purchase of the home during the lease period. The lease period and amount vary by program. Housing counseling and homebuyer education are often an integral part of the lease-purchase program requirements.

Lease-purchase is eligible under the HOME Program as a form of homeownership assistance. HOME funds are used to assist a tenant or household currently renting a unit to purchase the unit. In order to qualify for lease-purchase assistance, a household must be income eligible at the time that the HOME lease-purchase agreement is signed.

HOME lease-purchase agreements require that the tenant purchase the unit within three years of signing the agreement. In the event that the rental unit does not revert to a HOME homeowner unit at the end of the 3-year period, the PJ has six additional months to identify an eligible homebuyer to purchase the unit. During this interim period, the HOME affordable rental housing requirements at 24 CFR 92.252 apply to the unit. If an eligible homebuyer has not been identified at the end of this interim period, the unit must revert to a HOME rental unit, governed by all applicable HOME rental housing requirements, including affordability. Tenants receiving HOME TBRA to reside in the lease-purchase unit are eligible to receive HOME lease-purchase homebuyer assistance.

If lease-purchase housing is not conveyed within 36 months of signing the lease purchase agreement or within 42 months of project completion, the project becomes a HOME rental project subject to HOME rental rules.

For further guidance on the use of HOME funds to assist lease-purchase activities, please refer to HOMEfires Vol. 1, No. 10 online at: www.hud.gov/offices/cpd/affordablehousing/library/ homefires/volumes/vol1no10.cfm.

Under CDBG, rental assistance to tenants during the lease period prior to purchase is not generally eligible. However, at such time as the lessee chooses to exercise the option to purchase, homeownership assistance can be provided.

Financing and Developing Homebuyer Housing

This section highlights options and requirements for developing and financing homebuyer units. It discusses partners who can work with jurisdictions and forms of assistance for subsidizing homebuyer units. It also covers eligible costs, property types, and property standards. This section concludes with a summary of the other Federal requirements that apply to homebuyer housing.

Partners. Most jurisdictions work with nonprofit and for-profit partners to develop homebuyer housing. Potential roles for partners in homebuyer programs include the following:

• Acting as a subrecipient to manage a homebuyer program (such as a downpayment assistance program) on behalf of the jurisdiction. Note: this partner would need to be a nonprofit or public agency.
• Taking on a limited technical or administrative role for the jurisdiction, subrecipient, or developer, such as marketing the program, or helping the jurisdiction translate materials into the language spoken by neighborhood residents, or counseling buyers/owners.
• Acting as a developer to build or acquire and rehabilitate, homes for eventual sale to homebuyers.
• Acting as a community advocate or advisory group.

Forms of Assistance. Generally, for homebuyer assistance programs, the jurisdiction will use one or more of the following forms of assistance:

• Grants;
• Deferred-payment loans;
• Below market-rate loans; and
• Loan guarantees (under HOME).

Table 3-1 below lists the advantages and disadvantages of each of these forms of assistance.

Table 3-1: Advantages and Disadvantages of Various Forms of Assistance

Subsidy	Pros	Cons
Grants	Simple to administer Easy to explain Often necessary, especially to reach very low-income households	Expensive No repayment possible May be hard to “sell” politically May create expectations of additional free assistance in the future
Subsidy	Pros	Cons
Deferred Payment Loans (DPL)	Simple to administer Easy to explain Helpful, since no monthly payment required Flexible, allows for repayment Can help prevent windfall gain to borrower if property values increase significantly	No payment received on a monthly basis Might never be repaid if property has low value or future appreciation likely to be limited
Below Market Rate Loans	Provides immediate repayment to government agency Allows government agency to act as “banker” A financial payment obligation can help homebuyers to become more vested in their home	Time-consuming and staff-intensive to process loan requests Requires underwriting expertise Loans must be serviced after origination Can be an inefficient form of leverage, compared to DPLs and grants
Loan Guarantees	Simple to administer if no defaults, or if lender is responsible for disposition of property if default occurs Results in high leverage May induce lenders to make loans by softening loan-to-value and income-to-debt ratios	Does little to subsidize the cost to the homebuyer Shifts some or all underwriting and default risk from the lender to the jurisdiction No repayments to the program Can tie up funds for long periods of time NOTE: For homebuyer activities under the Direct Homeownership eligibility category, CDBG cannot be used for loan guarantees.

Eligible Costs. Jurisdictions must ensure that Federal funds are used only for eligible costs. However, a wide variety of costs are eligible. In general, there are three types of costs for homebuyer programs:

• Activity costs;
• Program or activity delivery costs; and
• Housing counseling.

Eligible Activity Costs. HOME and CDBG can be used to pay for a wide range of costs to assist developers and homebuyers to create affordable housing. Table 3-2 summarizes these costs.

Table 3-2: Eligible HOME and CDBG Costs for Homeownership Programs

	Eligible Homebuyer Costs for Direct Homebuyer Assistance Programs Purchase price assistance Downpayment assistance Closing costs, including financing fees, credit reports, title binders and insurance, surety fees, recording fees, transaction taxes, legal and accounting fees, cost certifications, appraisals
	Eligible Homebuyer Costs for Homeownership Development Programs (Note, for CDBG these costs cannot be incurred for new construction, unless it is carried out by a CBDO.) Acquisition of land and existing structures Site preparation or improvements, including demolition Securing buildings Construction materials and labor Architectural and engineering fees Builders’ and developers’ fees
	Relocation Costs Replacement housing, moving costs and out-of-pocket expenses Advisory services Staff and overhead related to relocation assistance

Relocation Costs. Under the Uniform Relocation Act, tenants who live in units that are purchased with Federal funds and who are asked to move out, are entitled to certain benefits. This applies to homeownership programs, as well as rental programs. So, if a HOME or CDBG-funded homebuyer purchases a unit that is currently occupied by a tenant and that tenant is displaced, the tenant is entitled to relocation assistance, even if the sale was voluntary for the owner of the property. Both HOME and CDBG can be used to pay for the costs to relocate these tenants. Note that if the only form of Federal assistance is provided under ADDI, the URA is not triggered for FY2004 funds and beyond.

Program or Activity Delivery Costs. Program or activity delivery costs are those jurisdiction or subrecipient costs that are necessary to deliver the homebuyer program. They include costs such as:

• Affirmative marketing and marketing costs;
• Inspections;
• Underwriting; and
• Environmental reviews;
• Specifications, if used for development;
• Other project costs incurred by the jurisdiction that are directly related to a specific project.

As noted in the previous section, CDBG and HOME handle program delivery costs differently. Under CDBG, costs for delivery of a program are covered under the program and therefore are outside of the administrative cap.

Under HOME, delivery costs can also be charged to the project if the jurisdiction tracks the costs to specific addresses and includes these costs within the maximum subsidy limit. If the costs cannot be attributed to a specific project, they must be counted as administrative. As noted in the previous section, CDBG can pay for program delivery costs for HOME projects, including tasks such as energy auditing, work specifications, loan processing, or inspections. Since these are eligible costs as housing services under 24 CFR 570.201(k), they do not count toward the jurisdiction’s CDBG administrative cap

Housing Counseling. Many jurisdictions offer housing counseling and education to homebuyer program participants. In some cases participation in such courses is a required part of program eligibility.

The term “counseling” is used broadly and may range from one-on-one credit counseling to classes on home maintenance or budgeting.

• Homebuyer counseling is an eligible cost under HOME, and might be charged as a project soft cost, an administrative cost, or, if provided by a CHDO, a CHDO operating expense. The method for charging these costs depends on who receives the counseling, and who incurs the cost. To charge counseling as a project cost, the household or individual counseled must become an owner of a HOME-assisted unit. When counseling costs are incurred by a project owner or developer, the costs must be charged as a project soft cost. For buyer education and counseling that is not targeted specifically to buyers of HOME-assisted units, the costs must be charged as administrative, or as a CHDO operating expense when incurred by a CHDO.vi

Grantees have several options to set up counseling programs under CDBG. The CDBG statute allows grantees to pay housing services costs related to administering HOME Program activities. So, grantees may choose to use CDBG to pay for housing counseling related to a HOME homebuyer project. Grantees can also set up a housing counseling program as a public service activity. These funds will count towards the grantee’s 15 percent cap on public service expenditures. A third option for providing housing counseling under CDBG is to do so as part of a CDBG-funded housing activity as a program delivery cost. Under this option, the grantee would offer counseling as part of its homeownership assistance program and the costs of the counseling would be included in the cost of the program.

Eligible Property Types

Both CDBG and HOME permit a wide variety of homebuyer unit types. Eligible property types include any property that will serve as the purchaser’s principal residence, including:

• A one-unit property;
• A two- to- four-unit property;
• If HOME funds are used to assist a purchaser to acquire one unit in a two- to- four-unit property and that unit will be the principal residence of the purchaser, the long-term affordability requirements apply to the assisted ownership

unit only. See the discussion on affordability in the “Ongoing Requirements” section of this section.

• If HOME funds are used to help a purchaser acquire one or more rental units along with the homeownership unit, the HOME rental affordability requirements apply to the rental units.
• PJs have the option of designating all or some of the units as HOME-assisted. If so designated, HOME requirements will apply, including long-term affordability requirements.
• If CDBG is used to purchase, if the property is three or four units, 51 percent of the units must be occupied by households that are low- or moderate-income; if it is two units, at least one unit must be so occupied.
• A condominium unit;
• A cooperative unit or a unit in a mutual housing project (if recognized as homeownership by state law); or
• A manufactured home. Under HOME, at the time of project completion, the manufactured housing must be connected to permanent utility hook-ups. The manufactured housing must be located on land that is owned by the manufactured housing unit owner, or on land for which the manufactured housing unit owner has a lease for a period at least equal to the applicable period of affordability.

It is important to note one key distinction between CDBG and HOME as it relates to eligible properties. HOME requires that properties not exceed a specified maximum value. Under HOME, the value of any homebuyer/homeowner-occupied property may not exceed 95 percent of the median purchase price for that type of single family housing for the area, as published by HUD. PJs also have the option of conducting a specialized market analysis that meets certain requirements established by HUD. (These can be found in the HOME Final Rule at 24 CFR 92.254 (a)(2)(iii).)

• Acquisition only. Under HOME, in the case of property that does not require rehabilitation, the sales price of the HOME property to be acquired by a homebuyer may not have a value that exceeds 95 percent of the area median purchase price for that type of housing.
• Acquisition and rehabilitation. If rehabilitation is required, the value of the property after rehabilitation may not exceed 95 percent of the area median purchase price for that type of housing. The after-rehabilitation value estimate should be completed prior to investment of HOME funds.

CDBG imposes no property value restriction.

Property Standards

As noted previously, CDBG and HOME differ on the required property standards. As with all HOME-assisted properties, homebuyer properties must meet certain written standards to ensure the health and safety of its beneficiaries, and the longevity of properties it has invested in.

• Acquisition. If no rehabilitation or construction is planned, the housing acquired must meet state and local housing quality standards and code requirements. If no such standards or codes apply, the property must meet Housing Choice Voucher Housing Quality Standards.
• Rehabilitation and new construction. Housing that is constructed or rehabilitated with HOME funds must meet all applicable state or local codes, rehabilitation standards and ordinances, and zoning ordinances. If no state or local codes apply, PJs must use a national model code.vii New construction must also meet the Model Energy Code.
• Manufactured housing. Manufactured housing must meet the Manufactured Home Construction and Safety Standards established in 24 CFR Part 3280, which pre-empt state and local codes covering the same aspects of performance for such housing.
• PJs providing HOME assistance to install manufactured housing units must comply with applicable state and local laws or codes. In the absence of such laws or codes, the PJ must comply with the manufacturer’s written instructions for installation of the manufactured housing units.
• Manufactured housing that is rehabilitated with HOME funds must meet the requirements outlined above that apply to all housing constructed or rehabilitated with HOME funds.

CDBG imposes no minimum property standard. However, grantees may wish to impose their own standards.

Other Federal Requirements

There are a number of other Federal requirements that apply to the development or financing of homebuyer units. Jurisdictions should carefully review the regulations and HUD guidance related to these requirements.

Ongoing Requirements

This section highlights the ongoing requirements related to homebuyer housing. This includes compliance with the HOME affordability period and ensuring the focus on low-income homebuyers.

Affordability Period

HOME requires an affordability period for homebuyer units. CDBG has no such provisions, but grantees may wish to impose these types of requirements.

During the long-term affordability period, homebuyers who receive HOME assistance to purchase their homes must continue to live in the HOME-assisted property as their principal residence. Although the assisted homebuyer must be low-income at the time the HOME funds are committed, once the qualified homebuyer purchases the property there are no further income limit requirements that apply to the existing homeowner.

However, if the assisted homebuyer sells his/her property during the affordability period, who can buy the property and whether the PJ recaptures any funds are determined by the provisions of the recapture or resale agreement that the PJ executed with the homebuyer at the time the HOME assistance was committed.

The long-term affordability period for HOME-assisted homebuyer housing is determined by the per-unit amount of HOME assistance that enabled the homebuyer to purchase the property, as follows:

• If the per-unit HOME assistance is less than $15,000, the affordability period is five years.
• If the per-unit HOME assistance is between $15,000 and $40,000, the affordability period is ten years.
• If the per-unit HOME assistance is greater than $40,000, the affordability period is 15 years.

The method for determining the amount of “HOME assistance,” for the purposes of determining the period of affordability, varies depending on whether the PJ chooses to use a recapture option or a resale option for controlling home sale during the affordability period.

The recapture option and the resale option respond to different market conditions. In its Consolidated Plan, the PJ must describe the recapture or resale guidelines it will use for each homebuyer program. The PJ may establish more than one type of option for the same program, provided the PJ advises the homebuyer about which option will be used before the HOME funds are committed.

Recapture Option

Recapture is a mechanism for the PJ to recover all or a portion of the direct HOME assistance if the initial HOME-assisted buyer voluntarily or involuntarily (through a foreclosure) sells the house during the affordability period. When a recapture option is used, the homeowner is at liberty to sell the HOME-assisted property to any buyer, at any price the market will bear.

When a PJ uses a recapture option, the period of affordability is based on the amount of direct HOME assistance that enables the buyer to purchase the unit. This includes any HOME assistance that reduces the purchase price from fair market value to an affordable price, or otherwise directly subsidizes the purchase by the homebuyer (such as downpayment assistance, closing cost assistance, mortgage financing, or interest rate buy-downs). This does not include the amount of HOME assistance in excess of fair market value that might be used to produce the unit.

For example, a PJ provides $75,000 in HOME development funds to a developer who sells the property for fair market value at $60,000. The homebuyer is also provided a HOME downpayment assistance grant in the amount of $5,000. The PJ uses a recapture option to ensure affordability. The period of affordability for this property is five years because the property was sold for fair market value and the direct assistance to the buyer is therefore $5,000.

Alternately, if the fair market value of this same property were $75,000 and the developer sold the property to the owner for $60,000, the period of affordability would be ten years because the assistance that enables the buyer to purchase the unit is $20,000 ($15,000 subsidy to write down the purchase price plus the $5,000 downpayment assistance).

For the repayment option, the HOME regulations require that PJs limit the recapture amount due upon resale to net proceeds, and if there are no net proceeds or the proceeds are insufficient to repay the HOME investment due, the PJ may recapture an amount less than or equal to the net proceeds. The net proceeds are the sales price minus loan repayment (other than HOME funds) and any closing costs. This means that if there is not enough net proceeds at the resale to repay the PJ the entire HOME subsidy that is due, PJs are not liable to HUD for difference between the original investment and amount available at the resale (or foreclosure). For more information on this issue see the HOME regulations at 92.254 and the HOMEfires, Volume 5, Number 2. This is available online at www.hud.gov/offices/cpd/affordablehousing/library/homefires/ index.cfm Once the recapture occurs, the long-term affordability period terminates and HOME requirements no longer apply to the property. The home can be sold to any homebuyer, regardless of income.

Resale Option

The resale option ensures that the HOME-assisted unit remains affordable over the entire period of affordability, even in the event of a subsequent sale. This option is often preferred by PJs in high cost or rapidly appreciating housing markets. Using this option, the PJ may either require the owner to sell to another eligible low-income homebuyer or establish a “presumption of affordability.” When the resale option is used, the period of affordability is based on the total amount of HOME funds used to assist the acquisition, development, and purchase of the housing (i.e., the HOME investment).

Resale Option with Development Subsidies. The resale option must be used when HOME assistance is provided only as a development subsidy and there is no direct HOME assistance to the homebuyer. Note that when the resale option is used, the affordability period is based on the total amount of HOME assistance invested in the housing.

For example, the PJ provides $50,000 in HOME assistance as a construction loan to a developer. The appraised value after construction is $45,000 because of neighborhood and market conditions. The house is sold for the fair market value of $45,000. Since there is no direct assistance to the homebuyer in this instance, the resale option must be used. The affordability period is fifteen years based on the total amount of the HOME investment, or $50,000.

Sometimes HOME assistance is structured so that both a development subsidy and assistance to the homebuyer are provided. This can occur when the PJ subsidizes the construction and developer sells the property to a low-income buyer at less than the fair market value. Other times this occurs when a PJ not only subsidizes the development, but also provides assistance to the homebuyer, such as downpayment or closing cost help. If a property is sold for less than the fair market value or if a homebuyer receives a subsidy, it is known as “direct homebuyer assistance.” When the homebuyer is provided direct assistance, the PJ has the option of imposing either resale or recapture requirements. If the resale option is used, the minimum affordability period must be based on the total amount of HOME funds invested in the acquisition and development of the property plus any additional HOME funds directly assisting the homebuyer. If the recapture option is used, the minimum affordability period is based on the amount of HOME assistance that enabled the homebuyer to purchase the property, as described above under the Recapture Option.

Sale to an Income-eligible Homebuyer. The resale option requires the following criteria to be met:

• The new purchaser must be low-income and occupy the property as the family’s principal residence.
• The sales price must be affordable to a reasonable range of low-income homebuyers, as defined by the PJ. Many PJs choose to establish the maximum sales price by calculating the maximum principal, interest, taxes, and insurance (PITI) that could be paid by a reasonable range of low-income households without exceeding 30 percent of gross income (a widely used standard of housing affordability).
• The original homebuyer, now the home seller, must receive a fair return on his or her investment, as defined by the PJ. The PJ should identify its method for determining a fair return in the written resale documents that apply to the property. The homeowner’s investment includes any downpayment, loan principal payments, and capital improvements financed by the homeowner.
• Once an affordable price that offers a fair return to the seller is established, a PJ may choose to require the repayment of all or a portion of the HOME grant or loan upon resale, should net proceeds from the sale allow this. This is most likely to occur in housing markets where prices are appreciating.

Presumption of Affordability. This option relies on the presumption that a specific neighborhood in its entirety is affordable and that it will continue to remain affordable for the foreseeable future, and therefore, any sale within that neighborhood will be affordable. In other words, market forces will ensure the continued affordability of HOME-assisted properties, and the PJ can presume the property will be sold at an affordable price to another low-income household. In order to rely on a presumption of affordability, the PJ must demonstrate that the neighborhood is, and is likely to remain, affordable by undertaking a market analysis and documenting the affordability of the neighborhood in accordance with specialized procedures established by HUD and outlined in the HOME Final Rule at 24 CFR 92.254 (a)(5)(i)(B). This analysis is subject to HUD approval, and must be periodically updated by the PJ.

Providing HOME Assistance to the Second Buyer. Under the resale option, if a new homebuyer receives HOME assistance to purchase a property that has previously been assisted with HOME funds, the PJ may terminate the original period of affordability. A new period of affordability may be established based on the amount of the direct HOME assistance provided to the new homebuyer, regardless of when during the initial period of affordability the property is sold. The PJ also has the option of retaining the original affordability period. If no new HOME assistance is provided, the new homebuyer must assume the remaining term of the original long-term affordability period.

Under both the resale and recapture options, the HOME regulations now allow for the investment of additional HOME funds to preserve homebuyer housing for which HOME funds were already used. Specifically, PJs may use additional HOME funds to acquire housing through a purchase option, right of first refusal or other preemptive right before foreclosure, to acquire the housing at foreclosure sale, to undertake any necessary rehabilitation, and to provide assistance to another eligible homebuyer. (This provision does not apply if the PJ forecloses on its own HOME loan.) The per unit subsidy limit applies to the total HOME funds used for the housing (the original amount plus the additional amount); however, administrative funds may be used for the acquisition and reimbursed upon the sale to a subsequent eligible homebuyer.

Enforcing Resale and Recapture Provisions

To enforce both resale and recapture provisions, PJs must execute an appropriate written agreement with the homebuyer. In addition, in order to enforce the resale provisions (except when a “presumption of affordability” has been approved by HUD), the PJ must impose a deed restriction, covenant running with the land or similar legal mechanism approved by HUD. Amounts subject to recapture provisions should be additionally enforced through deeds of trust, notes or mortgages. Most lenders and secondary market entities have loan products that accommodate these provisions, as long as they allow for the deed restriction or other restrictions to be lifted in the case of foreclosure. PJs can address lenders’ concerns, as the HOME Program permits the affordability restrictions to terminate upon foreclosure. As noted previously in this section, when the recapture requirement is triggered by a sale (voluntary or involuntary) of the housing, and there are no net proceeds or the net proceeds are insufficient to repay the HOME investment due, the participating jurisdiction may recapture an amount less than or equal to the net proceeds.

Low-Income Targeting

All HOME beneficiaries must be at or below 80 percent of the area median income, adjusted for household size. Under CDBG, unless the home is located in a blighted area or in some way qualifies for the Urgent Need national objective, households must also be low- and moderate-income.viii

HOME PJs and entitlement CDBG grantees have the option to choose one of three accepted methods for calculating household income:

• Part 5 definition of annual gross income (24 CFR Part 5.609);
• Census Long Form definition of annual income; or
• IRS 1040 definition of adjusted gross income

HUD provides a Web-based tool to assist jurisdictions in calculating income eligibility of program applicants. The HOME Income Calculator is available online at: https://www.hud.gov/offices/cpd/affordablehousing/training/calculator/index.cfm.

This Web-based resource provides concise, easy-to-understand guidance on determining the income and allowances of applicants to HOME-funded programs.

State CDBG grantees may choose to follow one of these three definitions, or they can choose their own income definition. HUD will give maximum feasible deference to the State’s choice of an income definition.

Further guidance on the calculation of income eligibility under the HOME Program can be found in the HOME program model guide, Technical Guide for Determining Income and Allowances for the HOME Program. Copies of this model guide are available through the HOME Program online library at Model Program Guides,  www.hud.gov/offices/cpd/affordablehousing/library/modelguides

Note that under CDBG, all activities—including homebuyer activities—must meet a national objective. In the past, there was confusion on the part of some grantees that believed that homebuyer activities could be undertaken under the area benefit or limited clientele low- and moderate-income national objectives. In fact, the only low- and moderate-income national objective that can be used for homebuyer activities is the housing national objective. This means that every homebuyer will need to be low- or moderate-income in order to use this national objective.

There is one exception to this rule. If a grantee has adopted a Neighborhood Revitalization Strategy Area (localities) or a Community Revitalization Strategy Area (states), then all of the housing (including rental and homeowner rehabilitation) for which it obligated funds in the area during a given program year may be counted toward the housing national objective and 51 percent of all the assisted units would need to be occupied by low- or moderate-income households.

However, if the grantee is using the direct homeownership assistance category at 570.201(n), all assisted households must be low- or moderate-income. The statute states that direct homeownership is for low- and moderate-income persons and therefore all households receiving assistance under this category must indeed be low- or moderate-income. The units created under a direct homeownership program may be included when aggregating housing units in a NRSA but none of the households provided homeownership assistance under 24 CFR 570.201(n) may be non-low-or moderate-income. However, as long as combined with other CDBG housing assistance programs, such as rehabilitation or acquisition for new construction, for which CDBG funds are obligated during the program year, they may be included in the aggregation.

Example: A grantee obligates CDBG for ten housing units in a NRSA during the fiscal year. Five are provided homeownership assistance under 24 CFR 570.201(n) and, by statute, must be occupied by low- or moderate-income households. Another five units received rehabilitation assistance. To meet the housing low moderate income national objective, six of the ten units (51 percent) must be occupied by low- and moderate-income households. So, only one of the rehabilitation units must be occupied by a low- or moderate-income household in order to meet the LM housing national objective.

3-1: American Dream Downpayment Initiative (ADDI)

Appendix 3-1

American Dream Downpayment Initiative (ADDI)—Side-By-Side Comparison of Downpayment Assistance Requirements—By Source of Funds

				ADDI FY 2003 Funds (2003 HUD Appropriations Act)¹
						ADDI FY 2004-2007 Funds (ADDI Legislation)¹			HOME Allocation (NAHA)¹
		FORMULA		Need² for, and prior commitment to, assistance to homebuyers	Need² by state; then, by local PJ. Funds to local PJs w/populations of more than 150,000 or allocation greater than $50,000 only			HOME Formula
		INELIGIBLE PJs³			The Commonwealth of Puerto Rico and local PJs in Puerto Rico
ELIGIBLE HOMEBUYERS				Must be “first-time” homebuyer	Must be “first-time” homebuyer			No “first-time” homebuyer requirement
		ELIGIBLE USES OF FUNDS		Downpayment assistance	Downpayment assistance and rehabilitation. Rehabilitation must be completed within one year of purchase			All HOME eligible activities. Rehabilitation property standards must be met within 2 years of purchase
		USE OF FUNDS FOR ADMIN COSTS4		Not eligible to pay admin costs; included in calculating HOME 10% admin limit	Not eligible to pay admin costs; not included in calculating 10% HOME admin limit			10% of HOME funds may be used for HOME admin, and the costs of administering ADDI
		ASSISTANCE CAPS		Subject to HOME maximum per-unit subsidy	Per-family limit: The greater of $10,000 or 6% of purchase price; Also subject to HOME maximum per-unit subsidy when used in combination with HOME			Subject to HOME maximum per-unit subsidy
		MATCH		Match requirement	No match			Match requirement
URA				Subject to URA	Not subject to URA			Subject to URA
		PROGRAM INCOME		Program income generated under ADDI treated as HOME program income	Program income generated under ADDI treated as HOME program income			HOME program income requirements
				ADDI FY 2003 Funds (2003 HUD Appropriations Act)¹
						ADDI FY 2004-2007 Funds (ADDI Legislation)¹			HOME Allocation (NAHA)¹
	REALLOCATIONS			No reallocation of funds is possible since the 3-year statutory limit on availability of appropriations will result in any funds recaptured after 24 months for failure to meet the commitment deadline being returned to Treasury	Funds reallocated as part of the next fiscal year’s ADDI formula distribution			HOME reallocation requirements
	CHDO			Not subject to CHDO set-aside; not an eligible use of set-aside funds	Not subject to CHDO set-aside; not an eligible use of set-aside funds			15 percent of HOME allocation set aside for CHDO projects; downpayment assistance not an eligible CHDO set-aside activity
	CONSOLIDATED PLAN			2004 Action Plan must address the use of these FY 2003 ADDI funds	Two new narratives (“outreach” and “suitability”) required beginning with the 2004 Action Plan in order to be eligible for ADDI funding; the Action Plan must also address the use of ADDI funds			No change

1 Statutory source of requirements.

2 “Need”: The percentage of low-income households residing in rental housing based on U.S. Census data.

3 NOTE: Insular Areas are not included in the definition of PJ in the HOME Program. Therefore, Insular Areas will not receive ADDI funding in FY 2004 and subsequent allocations. Funds allocated to Insular Areas in FY 2003 were 0.2% of the combined HOME/ADDI appropriation.

4 NOTE: Project soft-costs for the delivery of ADDI-funded downpayment assistance and (except for FY 2003 ADDI funding) rehabilitation are an eligible use of ADDI funds.