Combining Grants, Loans, and Down Payment Assistance 

Challenge

For low-income borrowers, there is frequently a gap between the amount of financing an individual qualifies for and the cost to construct a home. These gaps can often be closed by combining or otherwise leveraging multiple sources of additional funding and/or subsidy. However, this type of “stacking” requires a significant amount of knowledge and savvy on the part of a housing provider, which is often lacking in underserved rural markets.

Opportunity & Response

Many lenders and nonprofit organizations offer assistance in the forms of programs such as downpayment assistance which help low-income borrowers purchase homes. There are also potential opportunities to leverage multiple funding sources from organizations. For example, USDA Housing Preservation Grant (HPG) funds are typically used for repairing homes of very-low income homeowners through small grants up to $15,000. However, these funds can also be used for replacement housing. When used for replacement housing, there may be a possibility to combine the HPG funds with other types of grants or subsidies, offering greater flexibility to housing providers. Additionally, it is important for providers to work across boundaries to best maximize and leverage all existing opportunities. Rural Studio is working with our partners to provide technical assistance and capacity building opportunities to our housing providers to do just that. For instance, by utilizing Fannie Mae’s sweat equity provisions in the Home Ready program to provide a necessary down payment, a lending partner can then shift their down payment assistance resources to cover other costs related to loan origination and closing.

Implementation

Chipola Street

Unaka

National vs. Local Policy Understanding

Challenge

From lending to insurance, and from permitting to appraisal, a disconnect between federal or corporate entities and their local agents often lead to discrepancies in understanding of rules and policies. This can lead to inconsistencies in practice and application between states, regions and localities.

Opportunity & Response

Working directly with partners across the spectrum of home procurement and through research contracts such as this Rural Studio provides a feedback conduit between on-the-ground agents and their organizations to identify unintended barriers to equitable housing access and affordability. As a State Research University, we have additionally leveraged the Intergovernmental Personnel Act (IPA) Mobility Program to embed federal employees more directly in the research.

Implementation

Chipola

Appraised Value

Challenge

Beyond-code building performance provides a demonstrated value-add that enhances home value. However due to the uneven nature of appraiser training and understanding of this increased value (particularly in rural areas where comparables may not yet exist), this increase in appraised value is not always realized.

Opportunity & Response

Equally critical to building high-performance homes is working with appraisers to ensure that the value of the performance features is incorporated into the assessed value of the home. Rural Studio currently works directly with local appraisers on a project-by-project basis to communicate this enhanced value. As our housing partner network continues to expand, it is increasingly necessary to provide informational resources for appraisers so that they value high-performance homes for their full worth.

Implementation

Stevens

Wharf

Integrating Construction and Financing

Challenge

In the traditional home procurement process “affordability” is a simple function of reducing what a home costs to build, with little-to-no consideration of what value and savings the integration of “beyond code” or “green” construction provides to the homeowner. Building to beyond code standards certainly increases the cost of home construction, but simultaneously provides month after month and year after year savings through a reduction in energy bills, insurance costs, and the like. There is currently no provision for how these post-occupancy monthly savings might be leveraged to reconsider the financing and monthly mortgage carry of the homeowner, and thus such upgrades are most often perceived of as unaffordable. 

Opportunity & Response

Some not-for-profit housing providers are set up to consider the total cost of homeownership. For example, since Habitat for Humanity is in control of the project financing (both construction financing and the mortgage for the homeowner), they are able to work in an integrated construction and finance model, considering building performance in the total cost of homeownership. Rural Studio provides up front predictive energy modeling, testing and verification during construction, and ongoing post-occupancy monitoring and homeowner education to ensure the high-performance capabilities of the homes are both met and maintained. Where housing partners are in control of both construction and financing, the information developed through this process increasingly allows our housing providers to integrate the high-performance savings into their overall housing finance and delivery strategy.

Implementation

Stevens

Local Lender/Borrower Relationships

Challenge

Some low-wealth borrowers do not meet traditional lending requirements because of a lower-than-allowed credit score, and traditional mortgage lenders understandably require potential borrowers to become “credit worthy” before they are considered for a mortgage. While a low credit score can indicate an unacceptable level of risk for a lender, it may also be reflective of a credit shortfall caused by collateral challenges due to the potential borrower being inadequately housed. While these are the potential homeowners that have the most to gain from the obligations of service by depository institutions, this gap between a buyer’s existing credit profile and a traditional lender’s ability assess risk based on the particular circumstances of that buyer is most often insurmountable.

Opportunity & Response

“Housing First” not-for-profits (NFPs) that work locally in the communities they serve have a better ability to consider the extenuating or mitigating circumstances of a specific borrower. For example, a mortgage candidate may have a low credit score because they are unbanked or underbanked. Local NFPs have the unique capacity to work with individuals on a case-by-case basis to first get them into secure housing and then spend time “seasoning up” the homeowner’s credit and financial literacy such that they can be transitioned to a more conventional mortgage product. There is a clear opportunity here for traditional lenders to partner with these NFPs strategically to develop a type of “step-up” program in which the NFP assumes the initial housing risk but leverages resources already developed by the lender to provide the necessary homeowner education and counseling to maintain lower than average delinquency rates.

Implementation

Myrtle

Stevens

Chipola