CHAPTER 5: HOMEBUYER ACTIVITIES

CHAPTER 5: HOMEBUYER ACTIVITIES

Homebuyers may use HOME funds for acquisition only, acquisition/rehabilitation or new construction of homes. This chapter covers the kinds of assistance that may be provided to homebuyers, eligibility criteria, and how HOME funds may be used by applicants. It also discusses homebuyer program design issues facing the participating jurisdiction (PJ), including working with private lenders and selecting an appropriate recapture or resale method.

This chapter is divided into two parts: HOME Program requirements, and program design and implementation issues.

PART I: HOME PROGRAM

REQUIREMENTS

This part covers the kinds of HOME assistance that may be provided to homebuyers, eligibility criteria and long-term affordability. A summary of the key homebuyer rules and how to document compliance with the requirements of these rules is provided as Exhibit 5-5.

ELIGIBLE ACTIVITIES

Homebuyer programs can be structured in any number of ways to encourage the acquisition, acquisition and rehabilitation, or the new construction of affordable homes. Program design will be guided mainly by community needs and the local housing market.

? Acquisition: Acquisition is an eligible activity under HOME.

9 The PJ can help eligible homebuyers purchase affordable homes by providing downpayment or closing cost assistance, or by reducing the monthly carrying costs of a loan from a private lender. (PJs could also provide mortgages for home purchase, although few do this because it constricts the number of households that can receive assistance.)

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9 If HOME funds are used to assist a homebuyer who has entered into a contract to purchase housing to be constructed, the homebuyer must qualify as a lowincome family at the time the contract is signed.

9 This approach to homeownership is best used in areas where an adequate supply of housing exists and where a grant or loan can make housing affordable to lowincome households.

9 For a discussion of appropriate forms of assistance, see the next section, "Forms of Financial Assistance."

? Acquisition and rehabilitation: HOME funds can also be used to fund rehabilitation activities. In areas where there is insufficient standard housing, the PJ may want to incorporate a rehabilitation component into its homebuyer program. In this case, there are two acceptable approaches.

9 The PJ might acquire and rehabilitate, or assist a developer to acquire and rehabilitate, substandard properties to be sold after rehabilitation to low-income purchasers.

9 As an alternative, the PJ might provide assistance directly to the homebuyer to perform the rehabilitation after the purchase. In such programs, the PJ will often offer rehabilitation loans in addition to, or instead of, the downpayment and closing cost assistance discussed above under "acquisition." PJs may also use a loan guarantee to minimize the lender's risk associated with the rehabilitation work. See the next section, "Forms of Financial Assistance," for more discussion.

? New construction: New construction is also a HOME eligible activity.

9 In areas where there is an insufficient supply of appropriate housing, the PJ may want to provide subsidies to stimulate construction of new housing.

9 The PJ may develop housing itself or may work directly with developers to construct this housing. Another option is to provide HOME funds to other organizations or individuals to contract for the construction.

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Lease-purchase: A lease-purchase option may be used in conjunction with a homebuyer program.

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.

? Ownership must be conveyed to an eligible homebuyer within 36 months of signing the lease-purchase agreement, or within 42 months of project completion. The affordability period of the unit commences when ownership of the unit is conveyed to the homebuyer.

9 If at the end of the 36-month period, the household occupying the lease-purchase unit is not eligible or able to purchase the unit, the PJ has an additional six months to identify an eligible homebuyer to purchase the unit.

9 In all cases, if a homebuyer does not purchase the unit by the end of the 42-month period, it must turn into a HOME rental unit.

? In accordance with an amendment to the HOME statute effective October 21, 1998, the homebuyer must qualify as a low-income family at the time the lease-purchase agreement is signed.

Lease-purchase arrangements can assist households at the lower end of the income range by helping them to accumulate a downpayment while they build their "ownership skills."

HOME-assisted rental units may be converted to homeownership units with or without the use of additional HOME funds by having the owner of the rental units sell, donate or otherwise convey the units to the existing tenants.

? If additional HOME funds are used to help the tenants become homeowners, the minimum period of affordability is the affordability period required by the amount of direct homeownership assistance provided (see discussion under "Long-Term Affordability" later in this chapter).

? If no additional HOME funds are used, the homeownership units are subject to the resale provisions and to a minimum period of affordability equal to the remaining affordability period that would apply if the units continued as rental units.

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CHAPTER 5: HOMEBUYER ACTIVITIES

ADDI is designed to operate as a homebuyer assistance program, within the PJ's existing HOME Program, for lowincome families who are first-time homebuyers purchasing a single family housing that serves as the family's principal residence. The requirements are detailed in Attachment 5-1 and on HUD's website.

FORMS OF FINANCIAL ASSISTANCE

PJs may use any of the forms of financial assistance described in Chapter 2: General Program Rules to structure HOME assistance for homebuyer activities. Generally, for homebuyer assistance programs, the PJ will use the following forms of assistance:

? Grants;

? Deferred-payment loans;

? Below-market-rate loans; and

? Loan guarantees.

These forms of assistance are discussed in detail in Chapter 2: General Program Rules and their benefits for homebuyer programs are provided in Exhibit 5-1.

In determining the forms of assistance, the PJ should consider the particular needs of the program's target participants. The following list discusses alternative designs for homebuyer programs and the appropriate forms of assistance.

? Downpayment and closing-cost assistance: For many potential homebuyers, the biggest barrier to homeownership is the downpayment and closing costs. While they may have a steady income that would allow them to make monthly payments, they do not have the means to save for the upfront costs of purchasing a home. In these cases, HOME funds can be provided in the form of a grant or a deferred-payment loan. When deciding whether to use grants or deferred-payment loans, consider the factors listed in Exhibit 5-1.

? Gap financing: Other homebuyers may have a steady income that is insufficient to cover the total monthly payment. In this case, HOME funds can be used to reduce monthly carrying costs by providing gap financing.

9 The most efficient way to reduce the size of the monthly payment is to provide the homebuyer a grant or a loan (deferred-payment or below-market interest) to reduce the principal amount that he or she must borrow. (However, the PJ may also consider an "interest

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buydown" -- providing funds directly to the lender to reduce the interest rate on the borrower's loan.)

9 The gap financing, if provided as a loan, can be paid in small monthly installments (for a below-market-rate loan) or at the sale of the property (if a deferredpayment loan).

9 For additional considerations about grants and loans, see Exhibit 5-1.

? Development subsidy: Another way to reduce the homebuyer's monthly housing costs is for the HOME program to subsidize the sales price of the house. If the HOME program provides a developer a subsidy, the developer can then offer the home at a lower sales price that presents a lower burden to low-income homebuyers. The development subsidy is generally a grant to the developer.

? Loan guarantees: Loan guarantees are a useful tool for strengthening partnerships between the HOME program and local lenders. By mitigating the risk to the lender, they allow lenders to make loans they might otherwise find too risky. This is particularly useful for projects that involve rehabilitation, or in cases where homebuyers have sufficient resources but are deemed to be high risks by the lender. Exhibit 5-1 lists the advantages and disadvantages of loan guarantees.

Subsidy Limits

Minimum HOME investment: The minimum amount of HOME funds is an average of $1,000, multiplied by the number of HOME-assisted units in the project.

? The minimum only relates to the HOME funds, and not to any other funds that might be used for project costs.

Maximum HOME investment: The maximum per-unit HOME subsidy limit varies by PJ. HUD determines the maximum amounts, which are based on the PJ's Section 221(d)(3) program limits for the metropolitan area, each year. An economist in a local HUD field office can provide these limits.

The maximum per-unit subsidy limit is:

? 100 percent of the dollar limits for a Section 221(d)(3) nonprofit sponsor, elevator-type development, indexed for base city high cost areas, and adjusted for the number of bedrooms.

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? For some PJs, the 221(d)(3) limit has already been increased to 210 percent of the base limit. For these PJs, HUD will allow, upon request, an increase in the per-unit subsidy amount on a program-wide basis. However, the absolute maximum subsidy limit that HUD will allow is 240 percent of the base 221(d)(3) limits.

ELIGIBLE COSTS

Exhibit 5-2 lays out the eligible HOME costs under a homebuyer program.

ROLES OF NONPROFITS

Potential roles for nonprofits in homebuyer programs include the following:

? A nonprofit may act as a PJ's subrecipient and manage a homebuyer program on behalf of the PJ.

? A nonprofit may take on a limited administrative role for the PJ, such as marketing the program in its neighborhood, or helping the PJ translate materials into the language spoken by neighborhood residents.

? A nonprofit may act as a developer, building or acquiring and rehabilitating, homes for eventual sale to homebuyers.

? A nonprofit may act as a community advocate or advisory group.

? A nonprofit may provide counseling to buyers/owners on behalf of the PJ.

? For a discussion of nonprofits that are CHDOs, see Chapter 3: CHDO Requirements and Activities.

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CHAPTER 5: HOMEBUYER ACTIVITIES

EXHIBIT 5-1

ADVANTAGES AND DISADVANTAGES OF VARIOUS SUBSIDY APPROACHES

SUBSIDY Grants

Deferred-Payment Loans (DPL)

Below-Market Rate Loans

Loan Guarantees

PROS

CONS

? Simple to administer ? Easy to explain ? Often necessary, especially to

reach very-low-income

? Expensive

? No repayment possible

? May be hard to "sell" politically

? May create expectations of additional free assistance in the future

? Simple to administer

? No payment received on a monthly

? Easy to explain

basis

? Helpful, since no monthly payment ? Might never be repaid if property

required

has low value or future

? Flexible, allows for repayment

appreciation likely to be limited

? Helps prevent windfall gain to borrower if property values increase significantly

? Provides immediate repayment to government agency

? Allows government agency to act as "banker"

? Time-consuming and staffintensive to process loan requests

? Requires underwriting expertise

? Loans must be serviced after origination

? Inefficient form of leverage, compared to DPLs and grants

? Simple to administer if no defaults, ? Do little to subsidize the cost to the

or if lender responsible for

homebuyer

disposition of property if default occurs

? Shift some or all underwriting and default risk from the lender to the

? Result in high leverage

PJ

? May induce lenders to make loans ? No repayments to the program

by softening loan-to-value and income-to-debt ratios

? Can tie up funds for long periods of time

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EXHIBIT 5-2

HOME-ELIGIBLE HOMEBUYER COSTS

HARD COSTS Acquisition of land and existing structures Site preparation or improvement, including

demolition

Securing buildings Construction materials and labor

RELOCATION COSTS Replacement housing, moving costs and out-

of-pocket expenses Advisory services Staff and overhead related to relocation

assistance and services

SOFT COSTS Financing fees Credit reports

Title binders and insurance Surety fees Recordation fees, transactions taxes Legal and accounting fees, including cost

certification Appraisals Architectural/engineering fees, including

specifications and job progress inspections Environmental investigations Builders' or developers' fees Affirmative marketing and marketing costs Homebuyer counseling provided to purchasers

of HOME-assisted housing Management fees Project costs incurred by the PJ that are

directly related to a specific project

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