Financing and Developing Homebuyer Housing

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





  • 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




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

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.

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