# Presentation: 549165

## 2005 ENTITLEMENT TRAINING FOR GRANTEES

**HOME Homebuyer Assistance**
- Scott Ledford, ICF Consulting

## Eligible Activities

- HOME can be used for:
- Acquisition
- Acquisition/rehabilitation
- New construction
- Lease-purchase if conveyed within:
- 36 months of signing OR
- 42 months of project completion

**Notes:**
Items under acquisition:
Buy down interest rate.
Items under acquisition/rehab:
Pay for some combination of the costs.
Loan, grant, etc.
Items under new construction:
Use HOME to build unit (“turn-key”).
Buy directly from a builder under contract.
Items under lease-purchase:
New owner works toward a purchase to become an owner (may involve housing counseling).
Family must qualify in terms of income at the time of signing the lease.  Even if his/her income goes up later he/she can still be in the program.
Person must become the owner within 36 months.  At that point, the subrecipient has six months to find someone who qualifies.  If not, it reverts to rental.

## Eligible Activities

- Conversion of HOME rental units to homeowner units
- If additional HOME funds  set affordability period by amount of direct assistance
- If no additional funds  minimum affordability of original rental units

## Forms of Assistance

- PJs generally use:
- Grants
- Deferred payment loans
- Below-market rate loans
- Loan guarantees

## Forms of Assistance

- HOME can be used for:
- Financial assistance
- Development/construction assistance
- Both
- Financial assistance includes:
- Downpayment/closing costs
- Gap financing
- Guarantees

**Notes:**
Remember the distinction between finance assistance and development/construction because it is important for resale or recapture.

## Eligible Costs

- Hard costs:
- Acquisition
- Site preparation or demolition
- Construction
- Soft costs:
- Fees and appraisals
- Homebuyer counseling
- Relocation Costs

**Notes:**
For HOME the relocation requirement is being changed so that if one low-income buyer voluntarily buys from another, it does not trigger relocation assistance.  For now the best way to run your program is to have people come to you before selecting a home rather than making a deal and then getting HOME assistance.  That way, subrecipients can pick units that avoid relocation. 

## Eligible Properties

- Eligible property types:
- Single-family home
- Two-to-four unit property
- Condominium unit
- Coop or mutual housing unit (if recognized as ownership by state)
- Manufactured home

## Maximum Property Value

- If acquisition only,
**Sales price **cannot exceed 95% of the median area purchase price
- If acquisition and rehab,
**After-rehab value **cannot exceed 95% of the median area purchase price
- 95% limit may be established by PJ or use HUD limits

**Notes:**
To figure out the median value, the PJ can 1) go to the 203(b) limits on the HUD Web site or 2) do a survey of recent sales in the community.  
Why is this rule in place?  There was an Indian tribe in Washington that put a lot of HOME funds into a single house.  

## Property Standards - Acquisition

- If acquisition only,
- State/local housing standards and codes
- If no state/local standards, then Section 8 HQS
- House must be inspected
- Must meet standards at time of occupancy

**Notes:**
Why you should not revert to HQS:  It said “if the hole in the wall is smaller than this book, it is okay.”  It is not a good standard. 

## Property Standards - Acquisition and Rehab

- If acquisition and rehab
- Written rehab standards, _and_
- State/local code/standards
- If no state/local code, meet a national code

## Acquisition and rehab (cont.):
Inspect prior to occupancy
No health and safety defects
before occupancy, or 
no later than 6 months after transfer
Meet applicable codes 
at project completion, or 
within 2 years of transfer

- Inspect prior to occupancy
- No health and safety defects
- before occupancy, _or _
- no later than 6 months after transfer
- Meet applicable codes
- at project completion, _or_
- within 2 years of transfer

**Property Standards - ****Acquisition and Rehab**

**Notes:**
If the person is going to move in during the rehab, they can’t do so until all the health safety defects are fixed and those things that need to be fixed within six months of selling them the property. 

## Property Standards - New Construction

- If new construction
- State/local code and standards
- If no state/local code, meet a national code
- Also meet Model Energy Code
- Section 504, as applicable

## Forms of Ownership

- Types of ownership allowed:
- Fee-simple ownership
- 99-year leasehold
- Condo ownership
- Coop or mutual housing ownership/membership, if recognized  by state law
- Other forms must be HUD-approved

**Notes:**
Indian projects have a 50 year lease to make them consistent with Indian housing program.

## Long-Term Affordability

**	****HOME $****	****	****Affordability Pd.**
- 	< $15,000			 5 yrs.
- 	$15,000 - 40,000		10 yrs.
- 	Over $40,000		15 yrs.
- No requirements that:
- PITI be affordable at purchase OR
- PITI remain affordable over time

**Notes:**
There is not a requirement on PITI.  If a person wants to spend 50% of their salary on a home, that is their choice – there is no one forcing the person to buy a house.
The program staff, however, might look over deals to make sure that un-savvy buyers aren’t victims of predatory lending.  Other programs incorporate homebuyer counseling.

## Recapture/Resale

- Compliance during the period of affordability:
- Recapture
- Resale

**Notes:**
People need some flexibility to move but we want to make sure the unit remains affordable.
Recapture – pay back the HOME subsidy
Resale – sell house to another low-income buyer
Lenders like recapture better.  They can resell house for as much as they want.  PJs preferences depend on their objectives.  Recapture is income back into their program, plus they don’t have to be involved in the next sale.  On the other hand, they might want resale if they are committed to a mixed-income neighborhood.  This can be decided on a case-by-case basis and doesn’t have to have it consistent program-wide.
Subs/PJs are supposed to pick one option or the other but if they get stuck, unable to sell the house, they can try recapture.  You have to pick resale or recapture at the front end, though, so the homeowner knows (as part of disclosure).  Recapture is most common.
A PJ could have, as part of its agreement, that they take a cut of the appreciation of the house.  In recapture, that would be recaptured funds.

## Recapture Provisions

- Recapture most like a conventional loan
- Buyer pays-back direct subsidy
- Direct subsidy is
- assistance that reduced purchase price from fair market value, _and_
- direct assistance to the homebuyer (e.g., down payment or closing cost assistance)
- May sell to any willing buyer

**Notes:**
What are you recapturing?
In HOME you can assist the developer or the buyer.  Recapture gets subsidies that go to buyers.  Developer subsidies are not recaptured.

## Recapture Provisions

- Recapture all or part of subsidy
- May forgive portion
- May share net proceeds
- Development subsidies NOT subject to recapture
- When no $ subject to recapture must use resale provision
- If development subsidy only

**Notes:**
The sub may not want to recollect all of the recapture funds, especially in case of a down market.  They may opt to forgive debt instead.

Development subsidies are not recaptured unless the money is left in the deal in the form of a sales price below the market price.

Share Proceeds – Refer to formula on page 5-16.

This is a case where there is not enough proceeds from the new sale of the home to cover all the money owed to everyone.

HOME/(HOME +Invest) X proceeds = recapture

20/20+10 X $15 = 10

Pay homeowner first

If you have zero proceeds you get zero recaptured.
Grants have to be resale (so you might want to call it a deferred payment loan instead).

If PJs want to avoid recapture, they might balance their financing to maximize the amount that goes to the developer and give a nominal amount to the homebuyer.

## Resale Provisions

- With resale, when home is sold:
- House must be affordable to new buyer
- New buyer must be low-income
- New buyer must occupy house as principal residence
- Original buyer must receive a “fair return”
- Remaining resale restrictions apply to new buyer

**Notes:**
Has to do only with who can buy the house.  Practical issue: how is the buyer to find a low-income buyer.  They might get the PJs help on this.

The house has to be sold at a price affordable to the new buyer.  The PJ decides what that means (e.g., no more than 30 percent of income, etc.)

Under what circumstances can new HOME money go into the home purchase by the second buyer?  

## Resale Provisions

- Presumption of affordability allowed with HUD approval
- Concept
- Homes are of modest value and will stay so
- Homes are affordable to low-income buyers using conventional financing
- Document with market analysis that is updated periodically
- Define neighborhood

**Notes:**
If the neighborhood is sufficiently low-income, you can make the case that your resale to anyone into that neighborhood will be to a low-income buyer.  How can you document this?  CDBG revitalization areas.  This is the presumption of affordability.  You can’t make this up after the fact, the presumption of affordability must already be in the HUD-approved Consolidated Plan.

## Enforcement

**Enforcement**

- Enforce recapture/resale requirements with:
- Deed restriction
- Covenant
- Lien
- Others

## The Applicant

- Low-income
- Property will be principal residence
- Income eligibility determined
- At purchase for existing housing
- At contract signature for new construction
- At signing of lease-purchase agreement

**Notes:**
For lease-purchase, you don’t need to periodically verify income of applicant.

## Income Eligibility

- To verify income:
- Use one of the three income definitions
- Review source documents
- Project income for next 12 months
- Income verification good for six months

**Notes:**
Must be consistent within a given HOME program on which definition the subrecipient uses.
Tax returns are not sufficient proof because they are past income and might no longer be accurate.  

## Income Eligibility

- Whose Income to count?
- All household members
- Part 5 definition counts all adult household members
- Projecting Income
- Verifying Income
- Source Documents
- Third Party

## Income Eligibility Verification 

- Review of documents include:
- Pay stubs, wage statements,interest statements, child support, etc.
- Be sure to verify overtime, tips and bonuses
- Third party verification
- Release authorizes information to be sent to agent

## Comparing Income to Limits

- Can get current limits from HUD @ www.hud.gov/offices/cpd/affordablehousing/programs/home/limits/income/index.cfm
- Determining household size
- do not count: foster children, live-in-aides, foster adults, unborn children
- do count: children pursued legal custody/adoption

## Timing of Income Certification

- HOME program permits verification dated no earlier than 6 months prior to eligibility
- Best practice is 90-120 days prior to effective date
- Must be qualified at move-in

## Initial Income Eligibility

- Income eligibility is determined using    1 of 3 definitions:
- Part 5 annual (gross) income (Section 8)
- IRS adjusted gross income - form 1040
- Census long form annual income

## Three Definitions

- Allows for PJ flexibility
- Eases administration when combining funds for projects with multiple funding sources (HOME with CDBG or LIHTC)
- Circumstances where adjusted household income is required
- One definition must be applied throughout each HOME-funded activity for all program applicants

## Basic Differences

- Child support: not included in IRS Form 1040 definition
- Alimony payments: included in IRS Form 1040
- Inheritances and insurance settlements: included in Part 5, not included in Census or IRS definitions