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.
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 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.
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.
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.
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