Fitting the Pieces Together: 

Using Public and Private Financing Tools with 

HOME-Assisted Homebuyer Programs

2004

U.S. Department of Housing and Urban Development 

Community Planning and Development 

Prepared by 

ICF Consulting

Foreword

A growing number of states and local jurisdictions have been using affordable housing funds to provide 

direct assistance to help low-income residents achieve the American dream: owning their own home. The 

many benefits of homeownership have long been recognized. In addition to the benefits to individual 

families, homeownership helps build stronger and more stable communities. Homebuyer programs are a 

relatively simple and cost-effective way to increase the housing choices of low-income Americans. 

The U.S. Department of Housing and Urban Development supports the goal of homeownership for lowincome residents. With funds provided by the HOME Investment Partnerships Program, states and local 

jurisdictions have the resources and flexibility they require to design homebuyer programs to meet their 

specific local housing needs. The American Dream Downpayment Assistance Initiative provides an 

additional funding source to help low-income households purchase their first home. 

The most effective homebuyer programs operate in a full public/private partnership. Participating 

jurisdictions know the participants in the housing industry, understand their motivations and organizational 

needs, and tailor their involvement in ways that are mutually beneficial. This publication, Fitting the 

Pieces Together: Using Public and Private Financing Tools with HOME-Assisted Homebuyer Programs, 

provides a road map for HOME Program staff to understand the ins and outs of home purchase lending, 

and thereby gain the maximum benefit from this valuable resource. 
Table of Contents

Introduction: Joining Forces with Mortgage Lenders ................................................................................1 

Chapter 1: What HOME Staff Need to Know About Private and 

 Public Financing of Homebuyer Housing................................................................................................3 

 Overview: Basic Roles of Primary and Secondary Mortgage Market Institutions..............................3 

 Major Private Financial Resources for Mortgage Lending ..................................................................4 

 Legislation that Leverages Private Support of Affordable Housing Lending ......................................7

 Major Public Financial Resources for Mortgage Lending ...................................................................8

 Secondary Market Institutions..............................................................................................................9 

 Subprime Lending ..............................................................................................................................10 

 Buyer Education and Counseling ........................................................................................................13 

 Origination: Standard Principles and Practices..................................................................................15 

 Servicing: Standard Principles and Practices .....................................................................................15 

Chapter 2: Issues Critical to the HOME Program...............................................................................18

 Overview of the HOME Requirements...............................................................................................18

 Eligible Homebuyer Assistance Activities ..........................................................................................18

 Eligible Costs ......................................................................................................................................20 

 Maximum and Minimum Per Unit Subsidies ......................................................................................22 

 Property and Ownership Requirements...............................................................................................23 

 Homebuyer Eligibility .........................................................................................................................25 

 Long-Term Affordability.....................................................................................................................26 

 Written Agreements.............................................................................................................................29 

 Record-keeping ...................................................................................................................................30 

 Other Federal Requirements................................................................................................................30 

Chapter 3: Understanding Loan Underwriting and Origination .......................................................36 

 Loan Origination .................................................................................................................................36

 Credit Enhancement ............................................................................................................................39

Using HOME-Assistance to Overcome Qualification Hurdles Responsibly.......................................40

 Loan Closing .......................................................................................................................................41

Chapter 4: Understanding Loan Servicing ...........................................................................................43

 Servicing’s Place in the Lending Industry...........................................................................................43

 Matching Servicing Routines to Borrower Risk Using Computer Models.........................................43

 Meeting Special Needs of HOME Borrowers .....................................................................................44

 PJ Responsibilities During the Period of Affordability.......................................................................45

Chapter 5: Maximizing the PJ's Relationship with Private and Public Lenders ..............................49

Choosing a Delivery System ...............................................................................................................49

 Defining Roles.....................................................................................................................................50

 Assessing and Recruiting Lending Partners........................................................................................52

 HOME’s Impact on Lender's Profitability...........................................................................................53

 What the HOME Program Offers Lenders: Leveraging the Best Deal ..............................................53
 Delivering and Funding Homebuyer Counseling...............................................................................55 

 Developing Lender Partners to Support Unusual Homebuyer Programs...........................................57 

 Conclusion..........................................................................................................................................62 

Index .........................................................................................................................................................63 
Introduction: 

 Joining Forces with Mortgage Lenders

Over the past ten years HOME participating jurisdictions (PJs) have devoted increasing portions of their 

HOME Program funds to homebuyer activities. This increasing emphasis on homeownership has been 

encouraged in part by research documenting the many benefits low-income families derive from owning 

their own homes. At the operational level, advances in the mortgage marketplace have facilitated the 

increase in HOME assistance for affordable homeownership. As lenders have developed tools to better 

understand the needs of low-income borrowers and evaluate risk, new lending products have been tested 

and the viability of the affordable homeownership market has been amply demonstrated. How should a PJ 

get started on re-designing a homebuyer program to synchronize it with the operations of the private 

mortgage market? 

To build a successful partnership with private lenders requires understanding the clients to be served and 

their home buying needs. A PJ with an affordable homeownership program acts as a kind of broker, 

bringing together lenders who want business and families who need homes. The PJ has to define the target 

population the program is designed to assist, and then determine what form of HOME assistance will best 

serve the population’s needs. The PJ needs to know what is keeping potential homebuyers from obtaining 

mortgages in the conventional market by answering the following questions: 

• Are high prices the primary reason clients cannot afford a standard mortgage? 

• Do clients have significant credit problems? 

• Can these problems be addressed through counseling, and if so, what kind? 

• Do potential buyers have a steady stream of income, but simply lack downpayment funds? 

• Do potential buyers lack the knowledge to find an affordable home? 

• What program delivery method will best meet these needs? 

PJs with a clear understanding of the home buying hurdles faced by their target populations will have a 

good foundation for initiating conversations with potential lenders. 

PJs should do their homework to determine which lenders can best help meet these affordable housing 

needs. PJs should remember that they are not shopping for just any lender, but are looking for a partner, an 

organization interested in accomplishing similar goals. PJs can quickly research local lenders and the loan 

products they offer. It may take a little longer to understand lenders’ level of interest in serving 

disadvantaged people or communities. PJs might want to learn if the institution has participated in other 

homebuyer programs, either locally or nationally, or whether it has received favorable Community 

Reinvestment Act ratings. To discover signs of flexibility that could benefit low-income borrowers, PJs 

should evaluate how the lender does business, whether it services the loans it originates, and how it 

underwrites loans. In addition to identifying lending partners, the PJ needs to plan for homebuyer 

education and counseling by identifying what entities are available to provide these services, and what 

funding is available to pay for them. 

After potential partners are identified, program design can begin. While HOME allows PJs a great deal of 

latitude to design programs to meet local needs, PJs need to be clear with their partners that certain 

regulatory requirements, as outlined in Chapter 2, are not negotiable, and certain monitoring 

responsibilities cannot be delegated. Likewise, PJs should keep in mind that lenders are risk-averse and 

profit-motivated. Knowing and articulating the business incentives for lenders to be involved in homebuyer 

programs will support an effective partnership. PJs should think about what aspects of their intended 

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programs might appeal to potential lenders, and look for points they can "sell" to the lending institution. Is 

the institution a local organization that wants to expand its market, perhaps in communities that are 

underserved? Or is the lender a national organization that needs to strengthen its ties to a local community? 

PJs need to present lenders with the key advantage that HOME support brings to a program: the ability to 

expand markets while responsibly managing risk. 

This guide will explore and explain these issues in the following five chapters: 

Chapter 1 introduces the major resources for mortgage lending and explains the considerations of 

industry participants when they provide financing. Chapter 1 discusses related services PJs should be 

aware of, including homebuyer counseling programs, loan servicing, and the growth of the subprime 

lending industry. Predatory lending practices are also outlined in this chapter. 

Chapter 2 reviews key regulatory issues involved in structuring HOME funds for homebuyer 

programs. It details eligible activities, income requirements, long-term affordability provisions, PJ 

monitoring responsibilities, and how those requirements might affect lender practices. 

Chapter 3 explains the major elements of loan origination and underwriting and discusses how PJs 

can reduce costs or obtain better terms for eligible homebuyers. This chapter describes how lenders 

evaluate credit, collateral, and a borrower’s ability to pay, and how origination fees and closing costs 

are structured. It also presents a variety of techniques PJs can use to provide loans, subsidies, and 

guarantees to reduce borrowers’ costs. 

Chapter 4 provides an overview of loan servicing practices, with a focus on how loan servicing 

techniques can meet the needs of low-income borrowers. This chapter discusses technological 

advancements that may make servicing more responsive to mortgage delinquencies, and addresses PJ 

responsibilities during the affordability period, including cases of foreclosure. 

Chapter 5 concludes this publication with advice for building partnerships with lenders, including 

identifying characteristics to consider in assessing potential partners and leveraging the HOME 

Program’s advantages to negotiate the best deals. This chapter discusses partners’ roles, different ways 

to structure a homebuyer program, and how to partner with lenders to provide counseling. The 

chapter also contains information on homebuyer programs that may be unusual for private lenders, 

including land trusts and manufactured housing. 

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Chapter 1: 

What HOME Staff Need to Know About Private and 

Public Financing of Homebuyer Housing 

Chapter 1 describes private and public tools available to finance HOME-assisted homebuyer 

housing, with a focus on the practices, motivations, and institutions that matter most to quality 

design and administration of HOME programs. 

Overview: Basic Roles of Primary and Secondary 

Mortgage Market Institutions 

The mortgage lending process begins with a borrower, a house, and a lender or "loan originator." These are 

the elements of the primary mortgage market. Primary lenders fall into different categories, including 

banks, thrifts, and mortgage bankers, but their similarities outweigh their differences. It used to be that 

originating primary lenders typically held mortgages as long-term assets for their portfolios. They usually 

handled the collection of monthly mortgage payments and processed delinquencies and foreclosures, too. 

In today’s mortgage business, most originators act as middlemen, originating loans for sale to secondary 

market investors like the Federal National Mortgage Association (Fannie Mae), Government National 

Mortgage Association (Ginnie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac). 

Secondary market investors specialize in attracting capital from a wide range of sources around the globe 

into the home mortgage market, which helps to reduce the cost of mortgage funds to the consumer. Lenders 

pay close attention to secondary market loan requirements even for loans they plan to keep as portfolio 

assets. Doing so preserves their ability to sell loans later on. 

Loan collection or servicing is a major source of revenue for primary mortgage lenders, not simply a 

routine footnote to the lending process. The typical servicing fee of 0.37 percent of loan balance adds up to 

a sizeable, low-risk stream of revenue when applied to large volumes of mortgages. Lenders who sell loans 

may or may not sell servicing rights along with them. 

What Do Primary Lenders Look For? 

Regardless of whether loans will be retained or sold, the main responsibility of a primary mortgage lender 

is to originate loans carefully so they perform as expected. Because loan pricing (interest rate) is based on 

expected loan performance, the primary lender’s diligence is the foundation of mortgage lending 

profitability. Primary lenders analyze borrowers’ willingness and ability to repay. They also evaluate the 

market value of the home being pledged as collateral for the loan. 

When primary lenders originate loans for sale to a secondary market investor, they act as agents for the 

investor. The secondary market institution that will fund and hold the loan specifies detailed standards for 

key loan characteristics like these: 

• Quality of borrower’s credit; 

• Monthly payment-to-income ratio; 

• Type of housing (condominium, town home, manufactured home); and 

• Ratio of loan amount to documented home value (loan-to-value ratio). 

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Even when they sell loans, primary lenders retain some risks. Secondary investors audit the loans they 

purchase, searching for flaws or guideline deviations. Primary lenders may be required to buy back such 

loans. In addition, secondary investors monitor the timely payment performance of loans, lender-by-lender. 

The terms of future loan purchases may be better or worse depending on the primary lender’s track record. 

What Do Secondary Market Investors Look For? 

Uniformity is all-important to the secondary mortgage market. A very wide range of loan types is 

accommodated, but each type is clearly defined. Standard documents are used. Standardization facilitates 

accurate performance prediction, and allows the use of statistical sampling to control loan quality even at 

huge volumes. Standardization transforms diverse mortgage loans from many geographic areas into 

commodities that are readily understandable, and therefore tradable in the broad capital markets where 

investors like insurance companies and pension funds shop for investments. Often the secondary market 

institution “bundles” individual loans into a mortgage-backed security, usually with a guarantee to the 

investor that payments will be timely. Securitization further enhances the attractiveness of investing in 

mortgages. 

Credit enhancement is the industry’s term for strengthening an individual mortgage borrower’s application 

with additional financial backing, typically in the form of insurance that protects the lender in the event the 

borrower defaults. Secondary investors specify the level and type of enhancement they require in order to 

make individual mortgage loans acceptable for purchase. Credit enhancement is almost always required on 

loans with less than a 20 percent down payment. Insurance providers are financially strong third parties 

like private mortgage insurance companies or government entities like the U.S. Department of Housing and 

Urban Development’s (HUD’s) Federal Housing Administration (FHA) and the U.S. Department of 

Agriculture’s (USDA’s) Rural Housing Service. Credit enhancement helps to define and limit how much 

an investor could actually lose in case of default. By reducing investor uncertainty about possible losses, 

credit enhancement is another tool for turning diverse mortgage loans into easily understandable 

commodities. 

What Do Loan Servicers Look For? 

For loan servicers, scale is the key to profitability. To facilitate automated processing, servicers seek 

uniform pools of loans with clearly defined servicing requirements, late fees, and work-out guidelines. 

Servicers compare the size of the annual servicing fee to their estimated time for carrying out servicing 

responsibilities. They look for higher fees on higher risk loans that will demand more attention. 

Major Private Financial Resources for Mortgage 

Lending 

Although there are many distinct sets of participants in the private mortgage industry, there are relatively 

few operational differences in how they evaluate borrowers and originate and service mortgages. By 

understanding how the market is organized, PJs will know how to spot the distinctions that matter for 

effective program design. 

Mortgage Bankers 

Mortgage bankers specialize in originating loans for sale to investors. They do not raise funds with savings 

or checking accounts; instead, they borrow short-term funds to originate and then hold loans pending sale. 

Mortgage bankers fund more than half of mortgage loans annually.1 

Mortgage bankers usually have no asset portfolios. They rely on two basic sources of revenue: loan 

origination fees and loan servicing fees. Origination fees are charged to borrowers for the service of taking 

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applications, evaluating them, and funding loans. Servicing fees are built into the loan interest rate. 

Mortgage bankers may opt to collect loan payments themselves, earning fees gradually over time, or they 

may sell the servicing rights to another party and realize the value of the fees up-front. 

The mortgage banking business model means that mortgage bankers and secondary market investors rely 

on one another. Mortgage bankers cultivate a wide range of investors or “outlets” for their mortgages, so 

they can originate and sell loans of virtually any size or type. Major outlets include Fannie Mae, Freddie 

Mac, and Ginnie Mae, as well as wholly private mortgage investors who purchase “non-conforming” loans 

that are too large or otherwise unsuitable for government-sponsored investors. 

Mortgage bankers are major customers for the mortgage insurance and guaranty programs of the FHA and 

the Veterans Administration (VA). They originate more than 80 percent of all loans covered by these credit 

enhancement programs. FHA and VA loans account for 25 percent of all mortgage banker originations.2 

To the consumer, a mortgage banking institution is usually indistinguishable from a bank or thrift. Most 

major mortgage banking companies are owned by commercial banks, bank holding companies, or financial 

services firms.3 

Mortgage Brokers 

Brokers are independent marketing agents for wholesale mortgage lenders, including mortgage bankers. 

Typically organized as small businesses, each of the nation’s 30,000 mortgage brokerage companies 

markets loans for many different lenders. Brokers assemble loan application files for evaluation. They 

played a role in 55 percent of all loan originations in 2000. Brokers earn fees paid by borrowers and/or 

lenders. 

Mortgage brokers used to specialize in marketing for subprime lenders, who specialize in making loans to 

borrowers whose credit quality or backup documentation are insufficient to qualify for prime lending rates. 

Brokers have broadened their services to include prime quality loans, too. 

Brokers fill a particular niche in the highly segmented and specialized business of mortgage lending. Their 

strength is retail presence and marketing. Brokers enable loan wholesalers of all sizes to gain market 

presence quickly, without setting up offices or mounting a marketing campaign of their own. Brokers can 

help consumers navigate the application process, understand alternative loan types, and shop for a good 

rate. 

Consumer Problems 

Some brokers have caused problems with misleading marketing techniques. It is difficult for consumers to 

know whether a given broker is a neutral agent, representing various loan sources impartially, or whether 

the broker receives higher fees from particular institutions. Given that the broker’s fee can sometimes vary 

according to the consumer’s choice of a lender, the smart consumer retains responsibility for comparison 

shopping. 

So-called “yield spread premiums” are a controversial form of broker compensation. In this system, 

brokers get a higher fee when borrowers accept a higher interest rate—sometimes unknowingly. Even 

seemingly negligible variations in loan interest rates can add up to real money over the long term of a 

typical mortgage. Comparison shopping with attention to the exact terms of competing programs is the 

consumer’s best strategy. 

Commercial Banks 

Commercial banks originate about one mortgage out of four, and are indirectly responsible for substantially 

more through their mortgage banking subsidiaries. Banks maintain large portfolios of assets, ranging from 

bonds to commercial loans to mortgage loans. This business model (portfolio lending) gives them the 

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flexibility to decide whether to hold mortgage loans themselves, or sell them to secondary investors. If they 

sell, then their operation is subject to the same principles followed by mortgage bankers. On the other 

hand, if they retain loans, banks have the option of deviating from the standardized guidelines of secondary 

market investors. Often they choose not to deviate from them, in order to retain the ability to sell portfolio 

loans in the future. 

Some banks use portfolio lending to serve the needs of customers who might have difficulty qualifying for 

reasonably priced secondary market programs. For example, self-employed borrowers could benefit from a 

bank’s portfolio lending program. So could some first-time buyers whose credit, employment, or choice of 

home might not fit secondary guidelines. Often banks emphasize adjustable-rate loans in their portfolio 

lending, because adjusting the borrower’s interest rate eliminates the need to match long-term fixed-rate 

loans with long-term fixed-rate deposits. 

Banks sometimes originate special affordable, fixed-rate loans for low-income homebuyers for their own 

portfolios. Special terms may include high loan-to-value ratios, acceptance of subprime credit, or 

elimination of credit enhancement expenses and approval hurdles. Even though such portfolio loans may 

not meet secondary market standards at the time of origination, they can often be sold after a few years of 

good payment performance, known as “seasoning.” 

Thrift Institutions 

Thrift institutions include mutual savings banks and savings and loans. In the past, thrifts were the primary 

homeownership loan source. They used funds from savings accounts paying regulated interest rates to 

originate long-term, fixed-rate home mortgage loans for their own portfolios. As competition for savings 

increased with the advent of unregulated money market funds that paid higher rates, thrifts ran into trouble 

during the 1980s. The culmination was the collapse and restructuring of the entire thrift industry. Thrifts 

participate in the mortgage business along the same lines as commercial banks. They originate some 

adjustable rate loans for their own portfolios, although these have been relatively unpopular given the low 

level of fixed interest rates. Overall, thrift institutions originate about 20 percent of mortgage loans. 

Credit Unions 

Credit unions originate a very small percentage of total mortgage loans, although their market share is 

trending upward. Virtually all credit unions with more than $50 million in total assets offer mortgage loans. 

Terms are similar to those of other mortgage market lenders, with an emphasis on member service. 

Finance Companies 

Finance companies specialize in mortgage lending to borrowers with subprime credit. The purpose of 

subprime lending and its associated benefits and risks are discussed in more detail later in this chapter. 

Community Development Finance Institutions 

Community development finance institutions comprise a small group of lenders specializing in community 

development lending. Some, but not all, originate mortgage loans. Leading examples of community 

development banks include the South Shore Bank in Chicago and Self-Help Credit Union in North 

Carolina. 

Development finance institutions may be organized as for-profit or nonprofit organizations. Both South 

Shore and Self-Help combine regulated finance institutions with other development organizations within 

the structure of a single holding company. 

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The U.S. Treasury Department administers the Community Development Finance Institutions Fund to 

support development finance institutions. Additional information about this fund can be found at 

http://www.cdfifund.gov/. 

For HOME PJs, community development finance institutions offer the advantage of like-minded partners 

with the expertise to help structure innovative mortgage loan programs. Their trade group is the National 

Community Capital Association, and additional information is available from their website at 

www.communitycapital.org. 

Mortgage Industry Trends 

Despite their different origins and designations, the various types of mortgage lenders now do business in 

much the same way. Increasing concentration is predicted for the mortgage industry, with one forecast 

calling for 90 percent of mortgage loans to be originated by just 25 firms in 2008.4 Specialization will 

increase as well, as specific functions like origination and servicing are located in discrete business units. 

Financial services companies are playing larger roles in the mortgage market. They will gain further 

momentum due to banking reform legislation enacted in the late 1990s. 

Legislation that Leverages Private Support of 

Affordable Housing Lending 

Two pieces of Federal legislation are notable for their impact on encouraging private sector support of 

community development and affordable housing lending, the Community Reinvestment Act and the Home 

Mortgage Disclosure Act. 

Community Reinvestment Act 

Enacted in 1977, the Community Reinvestment Act (CRA) prohibits lenders from “redlining” parts of their 

market areas and broadly requires them to offer equal access to financial services throughout the 

communities in which they are chartered to do business. CRA has been a source of real clout for housing 

and community development advocates over the years, but CRA’s impact is constantly changing as Federal 

legislation and market trends transform the mortgage origination landscape. 

CRA is enforced by a lender’s regulatory agency through scheduled and special examinations. Lender 

mergers or branch closings prompt these special examinations, and community groups frequently intervene 

when lenders petition for approval of such activities. Advocates try to assemble a persuasive case that 

lenders have not complied with CRA, or they explore how the proposed new configuration of the 

institution will impact low- and moderate-income people and neighborhoods. As a result, lenders 

sometimes make special commitments to lend for affordable housing and community development. Almost 

$400 billion has been committed through such agreements. 

The rigor of CRA lender exams increased in the early 1990s, as lenders were scrutinized on new objective 

measures such as the number and percentage of loans, investments, and branches reaching low- and 

moderate-income communities. CRA is credited with having supported the expansion of major lenders into 

the low- and moderate-income market during this period. 

During the1990s, lenders who were not subject to CRA originated an increasing share of mortgage loans. 

This has been especially true in the booming subprime mortgage market. The landmark Gramm-LeachBliley Act (1999) also exempted some key lending institutions from CRA, for example, mortgage company 

affiliates of banks. The legislation made a passing CRA grade a critical requirement for institutions 

wishing to merge with insurance companies and securities firms. 

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Ten years ago, as many as 10 percent of banks failed their CRA exams. Grades are higher today. Virtually 

all large banks and 98 percent of small banks now receive passing grades. For many institutions, 

compliance reviews have become less frequent. The small lenders that comprise about 80 percent of all 

banks and thrifts are now examined for CRA compliance every four or five years. 

Home Mortgage Disclosure Act 

The Home Mortgage Disclosure Act (HMDA) requires lenders to report loan data that helps establish 

whether financial institutions are serving the housing needs of their communities. The data can also reveal 

possible discriminatory lending patterns. Data includes the borrower’s race, sex, income, and the basis for 

the lender’s approval or denial of applications. The law applies to banks, savings associations, credit 

unions, and other mortgage lending institutions. 

Using HMDA loan data, the Federal Financial Institutions Examination Council (FFIEC) creates reports on 

lending activities for each metropolitan area. These reports are made available to the public at 

www.ffiec.gov/hmda. 

Major Public Financial Resources for Mortgage 

Lending 

A number of public sector resources complement the private mortgage resources described earlier in this 

chapter. Public resources include both mortgage products such as mortgage insurance and subsidy 

programs. 

Federal Mortgage Products 

Perhaps the best known public mortgage products are the FHA’s mortgage insurance programs. FHA 

insurance, including the 203(b) program for home purchase and the 203(k) program for purchase and 

rehabilitation, covers mortgage lender losses in the event of default. To use FHA insurance, borrowers 

work with a participating lender and pay an insurance premium, which can be financed through the 

mortgage. From the PJ’s perspective, the key benefit of FHA programs is liberalized borrower qualification 

requirements, including reduced downpayments. There are no income limits, but HUD sets maximum 

mortgage amounts for various geographic areas. FHA mortgage limits are available on the HUD website at 

https://entp.hud.gov/idapp/html/hicostlook.cfm. 

The USDA’s Rural Housing Service (RHS) offers two mortgage products for low- and moderate-income 

borrowers in rural communities. The Section 502 Single Family Housing Loan Guarantee, much like FHA 

insurance, covers lender losses in the event of a default. No downpayment is required, and borrowers with 

annual household incomes up to 115 percent of the area median income are eligible. The maximum loan 

size is the same as for the FHA 203(b) program described above. 

In the Section 502 Direct Housing Loan Program, RHS itself is the lender. Borrowers whose annual 

household incomes are below 80 percent of area median income are eligible, and are not required to make a 

downpayment. RHS offers slightly longer than average loan terms, typically 33 years, and subsidizes 

interest rates. 

From the PJ’s perspective, the key benefits of RHS programs are the no-downpayment option and the 

subsidized interest rates of the Direct Loan Program. 

The U.S. Department of Veterans Affairs 

(VA) has a series of loan guaranty 

programs that provide benefits similar to 

those of FHA and the RHS guarantee. 

For more information on these Federal mortgage 

programsvisit the following websites: 

FHA 203(b)

http://www.hud.gov/offices/hsg/sfh/ins/sfh203b.cfm 

VA

http://www.homeloans.va.gov/ 

Rural Housing Service

http://www.rurdev.usda.gov/rhs/ 

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The VA programs are available to veterans or qualified guardsmen. In most cases, no downpayment is 

required. 

Mortgage Revenue Bonds and Mortgage Credit Certificates 

In addition to state HOME funds, state and local housing finance agencies use mortgage revenue bonds 

(MRBs) and mortgage credit certificates (MCCs) to help first-time homebuyers. 

Low-cost funds raised from tax-exempt mortgage bond investors are loaned to home buyers by private 

lenders, who then sell the loans to housing finance agencies. MRB loans are typically available for firsthome purchases by households earning no more than 115 percent of median income, although agencies can 

choose to set a lower limit. From the PJ’s perspective, MRB financing means an interest rate savings of 

about two percentage points below the market rate, and low downpayment requirements. 

Housing finance agencies may also offer Mortgage Credit Certificates, which provide qualified first-time 

homebuyers with a Federal income tax credit that reduces net interest expense. MCCs help borrowers 

increase repayment capacity and qualify for a larger mortgage. 

Local Resources 

Many local governments have devoted locally generated resources to affordable homeownership. 

Examples include issuance of general obligation bonds, incentive zoning for higher density, rebates of 

permit and hookup fees, and on-going housing trust funds. Locally generated resources can be more 

flexible and accessible than state and Federal funds. 

Federal Subsidy Resources 

Many different subsidy resources can complement HOME assistance. Two of the more prominent Federal 

resources are HUD’s Community Development Block Grants (CDBG) and the Federal Home Loan Bank 

System’s Affordable Housing Program (AHP). The CDBG program is a block grant provided from HUD 

to states and localities. It can be used for a number of community development purposes including 

homebuyer closing costs, interest subsidy, and downpayment assistance. Assisted households must 

generally have incomes at or below 80 percent of the area median income. Affordable Housing Program 

funds provide an extremely flexible housing subsidy. Funds are awarded competitively through member 

banks of the Federal Home Loan Bank system. Borrower income may not exceed 80 percent of the area 

median income as determined by HUD, and successful applications frequently target lower income buyers. 

These programs deliver subsidies that can dramatically increase affordability. When combining these 

sources with HOME funds, PJs will need to be sure their program design complies with the rules of both 

programs. 

Secondary Market Institutions 

Mainstream Secondary Market Institutions 

As explained earlier in this chapter, lenders often sell mortgages to investors in what is called the 

secondary mortgage market. By far the two largest secondary market entities are the Federal National 

Mortgage Association and the Federal Home Loan Mortgage Corporation, known universally as Fannie 

Mae and Freddie Mac. These publicly chartered but privately owned enterprises purchase mortgages from 

lenders and either hold them in portfolio, or bundle them into securities for resale to investors. A third 

government-sponsored enterprise, the Government National Mortgage Association (Ginnie Mae), acts as a 

guarantor for securities backed by loans insured or guaranteed by FHA, VA, or RHS. 

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From the PJ’s perspective, the government-sponsored enterprises (GSEs) are important because of their 

gigantic scale (they financed over $564 billion in 1999), which allows them to set many of the standards 

that are generally accepted by the modern mortgage market. They also innovate a wide range of special 

programs for affordable housing, and hire expert staff that can serve as resources for PJ program design. 

Alternative Secondary Market Institutions 

In addition to the GSEs, there are many alternative secondary market investors. Some are private entities 

and some have a public purpose. One of the largest is the Community Advantage program, a collaboration 

between the Self-Help Credit Union, Fannie Mae, and the Ford Foundation. The Community Advantage 

Program has purchased 20,000 loans as of 2001. Other examples include Neighborhood Housing Services 

of America, which buys loans from the Neighborhood Housing Services Network; the Community 

Development Trust, a public purpose real estate investment trust (REIT) that purchases debt as one of its 

activities; and the Community Reinvestment Fund (CRF) which has purchased more than 1,200 

development loans totaling more than $220 million. These secondary market alternatives are of interest to 

PJs because they generally can offer more liberal underwriting standards than those available from the 

GSEs. 

How Can Primary and Secondary Lenders Benefit HOME-Assisted 

Borrowers? 

In an effort to expand markets and sustain profitability, primary lenders have developed numerous flexible 

programs, many of which are suitable for borrowers in HOME-eligible income ranges. Publicly-chartered 

GSEs have been instrumental in supporting this expansion as a means to increase the nation’s 

homeownership rate, particularly among minorities and immigrants. 

For example, primary lenders have developed portfolio programs that can accept less-standardized loans 

and documentation than the secondary market requires. By holding loans in portfolio and retaining all of 

the credit risk, lenders are free to offer underwriting flexibility. Examples include accepting rent receipts in 

lieu of credit reports for applicants with limited credit histories, or accepting low credit scores. Once these 

loans are seasoned, they can be sold on the secondary market to investors like the Community Advantage 

program described above. 

Primary lender portfolio programs are limited in scale by a finite supply of loan capital. In contrast, Fannie 

Mae and Freddie Mac are linked to national and global capital markets, meaning that their supply of 

mortgage capital is essentially unlimited. For primary lenders, the benefits of Fannie Mae and Freddie Mac 

are access to capital and the ability to transfer interest and repayment risk. 

In exchange for the benefits they receive from their GSE status, Fannie Mae and Freddie Mac must achieve 

affordable lending goals set by the HUD Secretary. These include targets for lending to low- and moderateincome households. Motivated by these goals, as well as by a profit-motivated desire to expand the range 

of borrowers they can serve, Fannie Mae and Freddie Mac have developed a range of affordable loan 

products that PJs should be aware of. These affordable lending products permit higher house payment-toincome ratios, lower downpayments, flexible credit standards, and clear procedures for accommodating 

second mortgages from sources such as HOME funds. Both Fannie Mae and Freddie Mac support 

homebuyer education initiatives. Their regional and state office staff can structure targeted lending 

initiatives. 

Subprime Lending 

Interest rates on subprime loans are higher than the lowest or “prime” interest rates. Subprime loans are 

intended to serve borrowers who cannot qualify for the best rates, usually due to credit problems. 

10
Responsible subprime lenders charge extra interest in proportion to the additional risk they assume. 

However, subprime lending is not always conducted responsibly. Severe abuses that have systematically 

victimized low-income borrowers have earned the label of “predatory” lending. 

Subprime interest rates are typically three to four percentage points higher than conventional mortgage 

rates. Subprime loans typically charge higher processing fees too, and they are much more likely to include 

prepayment penalties than conventional prime interest rate loans. 

The subprime market is concentrated in low-income and minority communities. Subprime loans are three 

times more likely to be made in low-income neighborhoods than in high-income areas, and they are five 

times more likely in African-American neighborhoods than in white neighborhoods.6 Even after 

controlling for income, African-American borrowers and people living in predominantly African-American 

neighborhoods are more likely to refinance their homes in the subprime market than are white borrowers, 

or borrowers living in white neighborhoods. 

Recent Growth in the Subprime Lending Market 

Subprime lending has grown explosively in the past decade as lending institutions have found ways to 

reach consumers who simply would not have been considered under conventional lending standards. 

Mortgage companies specializing in subprime loans increased their share of home purchase mortgages 

from one percent in 1993 to 13 percent in 2000. Banks have also become leading players in the subprime 

market.7 As of 2000, subprime lending accounted for six percent of all home purchase loans and 25 

percent of refinancing loans.8 

The vast majority of subprime lending (80 percent) is made for the purpose of refinancing. Subprime 

refinance increased by 890 percent between 1993 and 1998.9 

Several factors have supported the rise of subprime lending. Rising levels of debt fueled consumer demand 

for a way to consolidate bills. Increased capital flows to the subprime credit market and successful 

marketing techniques drove loan volume. 

Subprime Loan Performance 

Research indicates that subprime mortgages are indeed riskier than conventional loans. Delinquencies in 

the subprime market averaged 13.5 percent, and loans in foreclosure averaged 2.6 percent during a recent 

21-month period. Mortgage delinquency rates in the prime market averaged 2.8 percent, and fewer than 

one percent of loans were in foreclosure.10 Even when compared to FHA loans, which also carry a higher 

level of risk, the foreclosure rate for subprime loans is greater, nearly four times the FHA foreclosure rate. 

The Impact of Foreclosure on Households and Neighborhoods 

A home foreclosure is obviously a major setback for an individual household. When concentrated 

geographically, foreclosures can also have devastating impacts on neighborhoods. Because subprime 

lending is disproportionately concentrated in low-income and minority neighborhoods, these 

neighborhoods bear a higher risk of concentrated foreclosure. All too often the cycle of easy credit and 

foreclosure leads to clusters of abandoned homes, a downward spiral in property values, deferred 

maintenance, and eventually, blight. 

Why Borrowers Choose Subprime Loans 

A number of factors lead borrowers to subprime rather than conventional loans. The prime motivation is 

credit history. Irregular income or a shortage of up-front cash can also block a household’s access to the 

prime market. Housing type is another factor. Although manufactured homes are a popular choice for low11
and moderate- income households, conventional mortgage lenders and public finance programs are minor 

players, leaving this $15 billion market open for subprime lending specialists. A similar lack of 

competition from conventional sources at the neighborhood level can leave borrowers in minority or lowincome areas with convenient subprime lending as their only loan option. Even where conventional 

institutions are present, lack of information about them and discomfort in dealing with them, can keep 

borrowers away. 

Too many borrowers turn to the subprime market when they do not have to, sometimes in response to 

aggressive marketing. As a result, some well-qualified borrowers wind up paying high subprime interest 

rates and fees. Nearly 30 percent of subprime borrowers could have qualified for prime loan terms. 

Steering borrowers unnecessarily to subprime products is an abusive marketing practice. 

Predatory Lending Practices 

Subprime lending is not synonymous with predatory lending, although the two terms are often used 

interchangeably. When does subprime lending cross the line and become predatory? Predatory loans take 

advantage of a consumer’s real or perceived lack of credit alternatives to charge excessive interest and 

fees, far beyond those needed to compensate for higher risk. 

These are some key features of predatory lending: 

• Targeted Marketing Based on Characteristics Other Than Credit. Marketing to a targeted 

audience is a common practice in most businesses. However, predatory lenders take this a step 

further, using market research on factors including race, age, and ethnicity to identify customers 

most vulnerable to abusive marketing. Predatory lenders often target elderly homeowners because 

they are more likely to have equity in their homes and have older homes in need of repair. This sets 

the stage for confusing marketing pitches. Loans often strip away equity with excessive up-front 

fees included in the financing. 

• Unreasonable and Unjustified Loan Terms. While it is normal for higher-risk loans to be priced 

to protect a lender’s profit margin, predatory loan marketers simply try to extract the maximum 

achievable rate. Excessive fees are charged and often financed for lump-sum insurance such as 

credit life,11 disability, unemployment, and health coverage. Loan prepayment penalties prevent the 

borrower from refinancing the high-rate loan. Others make repayment difficult or impossible, 

allowing the lender to foreclose on the property or to “rescue” the borrower with subsequent 

financing. 

• No-Benefit Refinancing. Predatory lenders sometimes refinance loans such as zero-interest 

mortgages. In such transactions, only the lender benefits. 

• Asset-Based Lending. Asset-based lending is the practice of originating loans on terms so lax that 

extremely high default rates are inevitable. Lenders benefit by selecting borrowers with substantial 

home equity collateral as targets for this tactic. 

• Fraudulent, Abusive, or Malicious Actions. Fraudulent practices can range from high-pressured 

sales tactics to intentionally misrepresenting the loan’s terms. As a result, homeowners may borrow 

more money than they need, or accept terms that block their ability to pay off the loan. A common 

abusive practice includes “flipping” loans, in which the loan originates at a standard rate but is 

repeatedly refinanced at higher rates with high up-front fees.12 

Responsible subprime loans are priced based on the actual risk the borrower presents plus actual additional 

processing costs. For example, origination fees may justifiably be higher for subprime loans due to the 

additional effort required to underwrite them. However, when lenders exploit the opportunity to add 

surcharges because borrowers do not know they have alternatives, or in fact do not have alternatives, they 

cross the line into profiteering and predatory lending. 

12
How HOME Can Deter Predatory Lending 

Through mechanisms such as pre- and post-purchase homebuyer counseling, PJs can raise awareness of the 

dangers of predatory lending among low-income borrowers, who are the most likely targets. 

The way HOME loans are structured can also help protect borrowers from predatory lending. Because 

most predatory loans are refinancings that target a homeowner’s equity, PJ approval can be required in 

order to place a second or third lien on a HOME-assisted dwelling. PJs can also simply prohibit refinancing 

of low-interest rate HOME loans. With this approach PJs avoid the administrative burden of reviewing 

individual refinancing requests. 

To fund general outreach and counseling efforts to deter predatory lending practices, PJs can use HOME 

administrative funds. However, if the outreach and counseling is targeted only to buyers or residents of 

HOME-assisted units, these costs can be funded from project soft costs.13 

Buyer Education and Counseling 

With their strong connections to nonprofit housing organizations, PJs are in a good position to broker the 

inclusion of buyer education and counseling in a homebuyer assistance program. Education and counseling 

programs for prospective and new homebuyers have become common features in affordable lending 

programs. The types of services available and the providers who deliver them are as varied as the local 

needs that they are intended to address. These services have long been recognized as an important means of 

guiding buyers through the complex and sometimes confusing process of buying a home. Today, education 

and counseling are increasingly available after a home purchase as well, to provide support and 

information that can prevent mortgage default. 

Part of the appeal of education and counseling programs is the dual benefit they offer to buyers and lenders 

alike. Information and guidance are important for new homebuyers who may be unfamiliar with the buying 

process, lending practices and needs, and ownership responsibilities. But education and counseling are also 

valuable to help lenders reach out to new customers while minimizing risk, by ensuring that borrowers are 

prepared to own a home. Post-loan communication becomes even more important as subprime lending 

increases. Maintaining contact with borrowers over time can help them avoid pitfalls such as refinancing 

on predatory terms. 

The following section outlines the major types of buyer education and counseling available, and who 

provides them. Recent findings on the effectiveness of education and counseling are also discussed. 

What Are Homebuyer Education and Counseling? 

Homebuyer education and counseling are two distinct activities, suitable for conveying different types of 

information. 

Buyer education is a way to provide general information, often for buyers who do not need a great deal of 

assistance. It is typically taught from standardized curriculums designed for a range of audiences. Tools 

may include brochures, handbooks, or classroom-style presentations. Increasingly, homebuyer education is 

provided over the phone, although it loses effectiveness compared to in-person delivery. When used in prepurchase situations, education covers topics such as understanding housing finance, selecting a real estate 

agent, evaluating a home’s condition, negotiating a home purchase agreement, and avoiding mortgage 

default. Because of its general nature and its ability to reach a large number of people, education is usually 

less expensive to provide than one-to-one homebuyer counseling. 

Homebuyer counseling may include education as a component, but it tends to be more tailored to the 

individual needs of participants. It is often provided in a one-on-one setting and takes place over a longer 

period of time, making it ideal for helping potential buyers address problems that require time and 

13
guidance to resolve. For example, improving credit history or establishing stable employment are 

challenges better suited to counseling support than classroom discussion. As counseling is usually the 

more intensive learning process of the two, it is also more expensive to provide. 

Post-purchase education and counseling can also help to sustain homeownership over time. Key topics for 

post-purchase counseling are home maintenance, repair, and household budgeting. If borrowers fall behind 

on payments, default counseling is provided in conjunction with the loan servicing institution. Counseling 

may be required for obtaining payment deferral from the lender, known as “forbearance.” Although 

intensive counseling can be expensive, lenders may find it more cost-effective than foreclosure. 

Education and Counseling Providers 

Many of the main participants in the financial industry have some level of involvement in providing 

counseling and education services. The following institutions are among the major providers and 

supporters. 

• Private Lenders. Lenders are the most typical sponsors of homebuyer education services, usually in 

partnership with nonprofit organizations or other agencies that deliver them. 

• Nonprofit Organizations. Nonprofits are major providers of both education and counseling, and 

are particularly prominent in providing pre-purchase counseling. Nonprofits also form partnerships 

with other organizations to deliver services, acting as a link between clients and lenders, and helping 

the lending industry reach underserved markets. 

• Government-Sponsored Secondary Mortgage Enterprises. When government- sponsored 

enterprises purchase affordable mortgage products from lenders, they often require that borrowers 

receive some sort of education or counseling. They have traditionally provided workbooks and 

teaching materials. 

• Mortgage Insurance Companies. Like lenders, mortgage insurance companies often form 

partnerships with other organizations to make education and counseling available. 

• Government Agencies. HUD has provided funds to counseling agencies for several decades. HUDapproved agencies can provide a full range of education and counseling services to meet the needs 

of particular communities. Additionally, state-housing finance agencies and local governments often 

provide counseling, especially in areas lacking nonprofit capacity. A list of HUD-approved 

counseling agencies is available online at http://www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm. 

Measured Effectiveness—Why Education and Counseling Are Important 

The near-universal presence of education and counseling programs in affordable lending programs 

suggests that they offer real benefits for borrowers and lenders. However, until recently there was little 

research to demonstrate that education and counseling actually reduce mortgage risk. A large-scale 2001 

study by a government-sponsored mortgage enterprise 

evaluated the impact of pre-purchase counseling on 

mortgage delinquencies, and developed empirical 

evidence that counseling can reduce delinquencies. 

The study also detailed how different types of 

education and counseling vary in effectiveness.14 

Table 1-1 

Results of Hirad-Zorn Study of Homebuyer 

Counseling Effectiveness

• Individual counseling: 34 percent reduction in 

90-day mortgage delinquency rates. 

• Classroom counseling: 26 percent reduction in 

90-day mortgage delinquency rates. 

• Home study counseling: 21 percent reduction in 

90-day mortgage delinquency rates. 

• Telephone counseling: reduction not statistically 

significant. 

The research considered four education and 

counseling formats: classroom, home study, 

individual counseling, and telephone-delivered 

education. The study analyzed 90-day mortgage 

delinquency rates of borrowers over a period of 18 

14
months and found that, generally, borrowers who had received pre-purchase education and counseling had 

19 percent lower delinquency rate than those who had not. While the study showed that the type of 

provider had no significant effect on mortgage delinquency rates, the training formats did have 

significantly varying effectiveness. Individual counseling had the greatest impact. Telephone counseling, 

which has rapidly increased in popularity in recent years, had no statistically significant imapct. Table 1-1 

compares the formats’ impact. 

Education and counseling were believed to hold positive benefits long before research confirmed their 

effectiveness. These services have won broad support from government, lenders, mortgage insurers, and 

the secondary market because of their perceived value to buyers and lenders. They help new homebuyers 

understand the institutions they will deal with and develop trust and confidence in the buying process. 

They prepare buyers for the responsibility of owning a home and increase their financial literacy. For 

lenders, education and counseling services are a way to increase business by reaching out to non-traditional 

markets and to helping communities that are underserved. For all parties, education and counseling are 

important ways to prepare applicants to be “mortgage-ready” and minimize delinquencies and defaults. 

Origination: Standard Principles and Practices 

The guiding principle of loan origination is risk evaluation. Will the borrower have the ability and 

willingness to repay the loan as agreed? Will the home provide sufficient collateral if the lender has to 

foreclose? The process of evaluating loan risk is discussed in detail in Chapter 3. The loan origination 

process entails an evaluation of: 

• Incom e documentation; 

• Household budget analysis; 

• Credit information; and 

• Apprai sal. 

The loan application, credit report, and the appraisal provide the information the lender needs to evaluate 

risk. At loan closing, information is updated and certified, and legal documents are executed to transfer 

ownership to the homebuyer, subject to the lender’s mortgage interest. 

Servicing: Standard Principles and Practices 

PJs have a long-term interest in seeing that new homebuyers succeed. A comprehensive buyer assistance 

program should address loan collection processes just as carefully as qualification and loan origination. 

Servicing Options and Functions 

When a lending institution makes a loan it becomes an asset to the institution. Like all assets, it must be 

managed. Originating lenders have three main options: they can keep the loan in their own portfolio and 

continue to service it; sell the loan in the secondary market, but retain the servicing rights; or sell the entire 

loan, including the servicing rights. 

Loan servicing includes the day-to-day functions of loan collection, including: 

• Collecting monthly payments from borrowers; 

• Forwarding proceeds to investors; 

• Sending payment notices and year-end statements to borrowers and tax authorities; 

• Administering escrow accounts to pay property taxes and hazard insurance; 

• Reporting loan performance details to investors; and 

15
• Intervening when payments are late. 

How Servicing and Origination Functions Differ 

In the past, the originating lender was likely to service a loan until payoff. But as the home mortgage 

industry has become more specialized, originating lenders increasingly turn loan servicing over to other 

entities, even for loans held in their own portfolio. 

This trend results partly from the fundamental differences between origination and servicing functions. 

Origination is an analytical process that involves a number of third-parties, such as appraisers, title 

companies, and underwriters. Servicing, on the other hand, is normally a straightforward, repetitive 

process. Only when payments are delinquent or loans default does servicing vary from the routine. 

Because servicing activities are predictable and standardized, servicing rights are relatively easy to price. 

Servicers achieve economies of scale by handling large numbers of loans. Although most common 

servicing functions are routine, some loans deviate. In cases of delinquency and default, servicing 

functions stretch to include working with borrowers to collect late payments, developing work-out plans to 

prevent defaults, or foreclosing. Foreclosure brings servicers the additional responsibilities of disposing of 

the property and filing the mortgage insurance claim. Because these functions are time-consuming, 

servicers are highly motivated to avoid foreclosure to reduce administrative costs that erode their slim 

profit margins. 

End Notes 

1 Market share data used throughout this chapter is based on the U.S. Department of Housing and Urban 

Development’s Survey of Mortgage Lending Activity, 1998. This data is available online at 

www.huduser.org/periodicals/ushmc/spring98/nd_fh.html. 

2 Mortgage Brokers Association. MBA Facts. July 17, 2001. Available online at 

www.mbaa.org/about/factsheet.html. 

3 La Cour-Little, Michael. “The Evolving Role of Technology in Mortgage Finance,” Journal of 

Housing Research, Volume 11, Issue 2 (2000): 175. 

4 National Association of Realtors, citing the Mortgage Bankers Association projections in "White Paper 

Predicts Fed Regulations Will Cause Market Concentration," News Release, May 14, 2001. Available 

online at News Media, Archived Press Releases, at 

http://www.realtor.org/rodesign.nsf/pages/newsmediactr. 

5 Gardner, John and Paul Manchester and Susan M. Wachter. “Guest Editor’s Introduction,” Cityscape, 

Volume 5, Number 3 (2001): 1. 

6 U.S. Department of Housing and Urban Development. Unequal Burden: Income and Racial Disparities 

in Subprime Lending in America. April 2000. 

7 Immergluck, Dan. “Stark Differences: Explosion of the Subprime Industry and Racial 

Hypersegmentation,” Home Equity Lending: 235. Available through HUD User at 

http://www.huduser.org/publications/pdf/brd/11Immer.pdf. 

8 Harvard Joint Center for Housing Studies. The 25th Anniversary of the Community Reinvestment Act: 

Access To Capital In An Evolving Financial Services System. (2002): 7. 

9 Immergluck, Daniel. A Comment on Credit Risk and Mortgage Lending: Who Uses Subprime and Why?

Woodstock Institute. (November 2000): 3. 

10 U.S. Department of Housing and Urban Development and US Department of the Treasury. Curbing 

Predatory Home Mortgage Lending. (June 2000): 34-35. 

16
11 Credit life insurance is sometimes offered to new borrowers. The lender is named as the beneficiary, 

and the coverage amount is the loan balance. As the loan is re-paid and the loan balance decreases, the 

coverage decreases. Premiums are typically held constant. 

12 Carr, James H. and Lopa Kolluri. Predatory Lending: An Overview. Fannie Mae Foundation. 2001. 

13 U.S. Department of Housing and Urban Development, Office of Affordable Housing Programs. 

HOMEfires, Volume 1, Number 1. June 1, 1997. 

14 Hirad, Abdighani and Peter M. Zorn. A Little Knowledge is a Good Thing: Empirical Evidence of the 

Effectiveness of Pre-Purchase Homeownership Counseling. Freddie Mac, May 2001. 

17
Chapter 2: 

Issues Critical to the HOME Program 

Chapter 2 describes the requirements that apply to HOME-assisted homebuyer housing, with 

particular focus on income eligibility, long-term affordability, and property requirements. This 

chapter explores how lenders are likely to perceive these HOME requirements, and how the 

requirements might affect lender motivations and practices.

Overview of the HOME Requirements 

HOME funds are an extremely flexible source of support for homebuyer programs. The key regulatory 

requirements for HOME-assisted homebuyer programs relate to: 

• Eligible activities, costs, and forms of assistance; 

• Eligible properties and forms of ownership; 

• Income eligibility; and 

• Long-term affordability. 

This chapter reviews each of these key requirements and 

discusses how they are implemented in homebuyer programs. 

For detailed and up-to-date information on the HOME 

program, visit the HOME Program website at 

http://www.hud.gov/offices/cpd/affordable 

housing/programs/home/. 

Regardless of the level or type of benefits provided, HOME 

PJs need to comply with all HOME Program requirements, 

and document their compliance in project files. Homebuyer 

activities can be implemented directly by the PJ, through state 

recipients, subrecipients, Community Housing Development 

Organizations (CHDOs), or contractors, and/or in conjunction 

with banks and private developers. Sometimes, these partnerships present opportunities for coordination or 

streamlining of activities, such as sharing of a single appraisal between the first mortgage lender and the 

PJ. Other times, the differing motivations and needs of the PJ and its partner(s) are reason for PJs to make 

independent assessments of information regarding properties and buyers. Understanding the rules and the 

needs of each of the partners in a transaction can help PJs make appropriate decisions in program design 

and operations. Regardless of how, or with whom, a PJ forms its partnerships, it is the PJ that is 

accountable to HUD for ensuring that its HOME programs and activities comply with all applicable 

requirements. 

Regardless of how, or 

with whom, a PJ forms its 

partnerships, it is the PJ 

that is accountable to 

HUD for ensuring that its 

HOME programs and 

activities comply with all 

applicable requirements. 

Eligible Homebuyer Assistance Activities 

PJs can undertake many different HOME-eligible activities to support homebuyer programs. 

• Acquisition. The PJ can help eligible homebuyers purchase standard, existing, or newly constructed 

affordable homes by providing downpayment or closing cost assistance, or by reducing the monthly 

carrying costs of a loan from a private lender. Direct assistance to homebuyers to acquire a house is 

an eligible CHDO set-aside activity when the CHDO also owns, develops, or sponsors the housing 

being acquired by the assisted homebuyer. 

18
• Acquisition and Rehabilitation. The PJ can acquire and rehabilitate, or assist a developer to 

acquire and rehabilitate, substandard properties to be sold after rehabilitation to low-income 

purchasers. The PJ can also lend rehabilitation funds directly to buyers wishing to rehabilitate units 

after purchase. 

• Reconstruction. The PJ can rebuild, on the same lot, housing that was standing on-site at the time 

of project commitment, or replace substandard manufactured housing with a new or standard unit. 

Reconstruction is considered “rehabilitation” for the purposes of complying with the HOME 

requirements. 

• New Construction. The PJ can develop housing itself or may work directly with private and 

nonprofit developers, including CHDOs, to create new units. 

• Lease-purchase. The PJ can support lease-purchase arrangements to assist households at the lower 

end of the income range by helping them accumulate downpayment funds while building ownership 

skills. Homebuyers must qualify as low-income when they execute the lease-purchase agreement, 

and they must take ownership within 36 months thereafter. If the original lease-purchaser cannot 

take ownership within that time, the PJ has 42 months from the execution of the original leasepurchase agreement to find another eligible homebuyer and transfer the property. If this deadline is 

not met, the property becomes a HOME rental property and the HOME rental rules apply. 

• Loan guarantee (single loan or pool of loans). The PJ can invest HOME funds to guarantee loans 

made by lenders, and, if required, establish a loan guarantee account. The amount in a loan 

guarantee account must be based on a reasonable default rate, but under no circumstances may the 

amount on deposit exceed twenty percent of the total outstanding principal amount guaranteed.1 

Factoring in community needs and local market conditions, PJs can structure homebuyer programs and 

provide assistance in a number of different ways. Following are some common forms of assistance in 

homebuyer programs: 

• Downpayment and closing cost assistance work well to help households that have enough income to 

pay monthly housing costs, but need additional upfront capital. 

• Loans or grants to homebuyers are a relatively easy way to reduce the buyer’s monthly housing 

costs. HOME financing can close the gap between the sales price of the house and the amount of 

private mortgage the buyer can secure. Generally, loans are preferable to grants because they 

provide the PJ some program income upon repayment, which can be used for additional affordable 

housing activities. 

• Interest rate buy-downs, by providing funds to the lender in order to lower the interest rate offered to 

the buyer, can effectively reduce monthly housing costs to a borrower who secures a loan from a 

private lender. However, this technique can become expensive for long-term loans. 

• Development subsidies for newly constructed or rehabilitated housing are typically provided directly 

to the developer. The developer can then offer a home to a low-income homebuyer at a sales price 

that is lower than the cost of producing the housing. This is an important strategy in markets where 

development costs exceed the market value of the developed property. This assistance is generally 

provided as a grant or a deferred payment loan to the developer. If the property is sold at market 

value to the low-income buyer, the development subsidy is not considered assistance to the buyer. 

However, if no other HOME assistance is provided directly to the homebuyer, the resale option 

must be used to meet the HOME long-term affordability requirements. 

19
Eligible Costs 

Regardless of the PJ’s chosen program design, the PJ must use HOME funds only for eligible costs for 

HOME-assisted units. Table 2-1 provides a summary of HOME-eligible costs. 

Where the PJ is directly involved in construction or rehabilitation, contractor invoices, payment vouchers, 

and PJ on-site inspection records should provide a paper trail for documenting costs. When the PJ is simply 

providing downpayment assistance, a good practice is to obtain a copy of the HUD-1 (Good Faith Estimate 

of Settlement Costs) used at closing to detail all costs and sources of financing. 

Allocating Costs in Multi-Unit Projects 

HOME funds can only pay for the eligible costs of 

HOME-assisted units. Furthermore, there are limits 

on the amount of HOME subsidy that can be used 

for each assisted unit. For multi-unit housing 

projects with multiple-financing sources, HUD 

provides guidance on allocating costs to help PJs 

determine the maximum amount of HOME 

assistance and the number of HOME-assisted units 

in the project. 

Table 2-1 

Eligible Costs

Hard costs

Acquisition of land and structures; 

Site preparation or improvement, including demolition; 

On-site infrastructure costs; 

Securing buildings; and 

Construction materials and labor. 

Soft costs

Financing fees, including origination fees; 

Credit reports; 

Title binders and insurance; 

Surety fees; 

Building permits; 

Independent cost estimates; 

Impact 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 HOMEassisted housing; 

Management fees; and 

Development costs incurred by the PJ that are directly 

related to a specific project, such as inspections, cost 

audits and loan processing. 

Note: Back taxes and fees are not eligible. 

Relocation costs 

Replacement housing, moving costs and out-of-pocket 

expenses; 

Advisory services; and 

Staff and overhead related to relocation assistance and 

services.

Note: Relocation costs are eligible for all units in a project, 

not just the HOME-assisted units. 

A multi-unit housing project can be treated as a 

single project if it is under common ownership, 

financing, and management (such as a 

homeownership subdivision project or owneroccupied two- to four-unit house). The method for 

allocating the HOME costs varies, depending on 

whether the residential units in the assisted project 

are comparable or not. The minimum number of 

units that must be designated as HOME-assisted 

units and the maximum amount of HOME funds 

that can be invested in a multi-unit project are 

determined by the cost allocation method used. PJs 

also have the option of designating all residential 

units in a multi-unit project as HOME-assisted or 

providing a lesser amount of HOME subsidy. 

These options and issues are explored at length in 

HUD Notice CPD-98-2, Allocating Costs and 

Identifying HOME-Assisted Units in Multifamily 

Housing, available online at the HOME Program 

website at 

http://www.hud.gov/offices/cpd/affordable 

housing/lawsandregs/notices/index.cfm. The 

following section summarizes these options. 

Units that are Comparable 

When all of the residential units in a multi-unit 

housing project are comparable in terms of 

bedroom size, square footage, and level of 

amenities (including appliances, fixtures, and 

20
materials), the ratio of HOME-assisted units to the total number of units must be at least equal to the ratio 

of HOME funds to the total funds invested in the project for HOME-eligible acquisition and development 

costs. The actual costs of any ineligible items and non-residential space (such as commercial space) must 

be subtracted from the total acquisition and development costs before allocating the costs. The maximum 

amount of HOME funds that can be invested in the project is determined by calculating the percentage of 

HOME-assisted units in the project and applying that percentage to the total eligible project acquisition and 

development costs, provided that the maximum per unit subsidy limits are not exceeded, as discussed 

below. 

For instance, a PJ invests HOME funds to pay for 25 percent of the HOME-eligible development costs of 

$3,500,000 for a sub-division project of 50 newly constructed units of for-sale housing. All units are 

comparable, there are no ineligible cost items or non-residential space and the project is under common 

ownership, management, and financing. Since the HOME funds are paying for 25 percent of the total 

eligible development costs, at least 25 percent of the units (13 units) must be designated HOME-assisted 

and sold to HOME-eligible buyers. Conversely, if the PJ has designated 25 percent of the units as HOMEassisted units, the maximum HOME investment cannot exceed 25 percent of the total eligible development 

costs, or $875,000. The PJ retains the right to designate a higher number of HOME-assisted units in the 

project, or to fund a lesser percentage of the total eligible development costs, if it so chooses. 

Units that are Not Comparable 

When all of the units in a multi-unit HOME-assisted project are not comparable, the PJ must identify the 

actual costs and allocate these costs on a unit-by-unit basis so that only the actual, eligible costs of 

acquiring and/or developing the specific HOME-assisted units are paid by the HOME Program. 

Common costs 

Costs for shared infrastructure systems, community space, and common facilities are allocated in the same 

manner as the housing unit costs. 

Only eligible common costs may be financed by HOME. For example, a freestanding community center or 

a community swimming pool is not eligible for HOME assistance. Actual costs for ineligible common 

items must be subtracted from the total common costs before allocating the common costs to HOME. If a 

housing project includes ineligible non-residential space such as commercial space, the common costs 

attributable to this non-residential space must also be subtracted from the total common costs before 

allocating the common costs to HOME. 

Only eligible on-site common costs are HOME-eligible. When a multi-unit housing development, such as 

a subdivision project, is under common ownership, financing, and development, it can be considered a 

single project site—even though the project will be subdivided and sold as individual units after 

completion. Therefore, the entire eligible common costs, such as the installation of roads, sewers, water 

mains, and electric lines within the boundaries of this subdivision project, may be included when 

allocating eligible costs to HOME. 

When all housing units are comparable and will benefit equally from the common systems, space, or 

facilities, the eligible common costs can be included in the total acquisition and development costs that are 

prorated proportionally as described above. When all units are not comparable, but will benefit equally 

from the common systems, space, or facilities, the eligible common costs must be allocated to each 

HOME-assisted unit based on the total square footage of the HOME-assisted unit as a percentage of the 

total square footage of all units sharing the common system, space, or facility. When all units will not 

benefit equally from a common system, space, or facility (for example, more extensive landscaping will be 

provided for the non-assisted units), the costs for that system, space, or facility must be allocated on a unitby-unit basis based on the actual acquisition and development costs of the eligible common cost. 

21
Regardless of the method used to determine the amount of HOME assistance per unit, the per unit HOME 

subsidy cannot exceed the maximum per unit HOME subsidy limits, as discussed below. 

Acquiring or Developing Two- to Four-Unit Properties 

In addition to the cost allocation and unit designation issues discussed in the previous section, when the PJ 

provides HOME assistance for the new construction, rehabilitation, or acquisition of owner-occupied twoto four-unit properties, there are additional circumstances to consider in allocating costs. The PJ should 

consult with HUD for further guidance. 

Allocating Buyer Education and Counseling Costs 

Homebuyer counseling is an eligible cost under HOME, and can be charged as a project soft cost; an 

administrative cost; or, if provided by a CHDO, as a CHDO operating expense. The method for charging 

these costs depends on who receives the counseling, and who provides the counseling services. To charge 

counseling as a project soft cost, the household or individual counseled must become an owner of a 

HOME-assisted unit. For buyer education and counseling that is not targeted specifically to buyers of 

HOME-assisted units, the costs must be charged as an administrative cost, or as a CHDO operating 

expense when incurred by a CHDO. When a project owner provides the counseling services, the costs must 

be eligible as a project soft cost since only the PJ or its subrecipient can incur eligible administrative costs. 

For more information, see HOMEfires Vol. 1, No. 1, June 1, 1997, published by HUD’s Office of 

Affordable Housing Programs. This document is available online at the HOME website at: 

http://www.hud.gov/offices/cpd/ affordablehousing/library/homefires/volumes/vol1no1.cfm. 

Maximum and Minimum Per Unit Subsidy Limits 

The amount of HOME assistance invested in a project must meet the minimum and maximum per unit 

subsidy limits established by the HOME Program, as follows: 

• The minimum HOME assistance is $1,000 times the number of HOME-assisted units in the project. 

• The maximum HOME assistance is an amount that cannot exceed the FHA 221(d)(3) mortgage 

limits for elevator-type projects that apply to the area in which the housing is located. The limits 

vary by bedroom size. The limits are available from HUD’s Multifamily Office or Program Center. 

There is no comprehensive list of these limits for all jurisdictions. 

• For multi-unit projects, the average HOME assistance for various unit sizes must be determined. 

When all HOME-assisted units are comparable based on square footage, bedroom size, and level of 

amenities, the average HOME assistance can be determined by dividing the total amount of the 

HOME assistance by the number of HOME-assisted units. However, when all HOME-assisted units 

are not comparable, the average HOME assistance must be determined for each unit. An acceptable 

method is to divide the unit’s square footage by the total square footage for all HOME-assisted units 

to calculate a percentage and apply that percentage to the total HOME assistance. The resulting 

proportional HOME assistance for that unit size cannot exceed the FHA 221(d)(3) mortgage limit 

for the bedroom size that corresponds to that unit. However, the majority of PJs find that because 

HOME is used as gap financing, the average per unit HOME assistance for all assisted units 

(regardless of bedroom size) is lower than the lowest 221(d)(3) limits (for a O bedroom unit), 

thereby making a more detailed calculation unnecessary. 

The PJ must combine both the HOME project development assistance and the direct homebuyer assistance 

when determining whether the project complies with the minimum and maximum per unit subsidy limits. 

More information on per unit subsidy limits can be found at the HOME Program website, at: 

http://www.hud.gov/offices/cpd/affordablehousing/ programs/home/limits/subsidylimits.cfm. 

22
The PJ cannot use more HOME funds, in combination with other governmental assistance, than is 

necessary to provide modest, affordable housing. When using more than one governmental source of 

funds, the PJ must perform a subsidy layering analysis to verify that this is the case. For additional 

information on conducting a subsidy layering review, see HUD Notice CPD-98-01, Layering Guidance for 

HOME Participating Jurisdictions When Combining HOME Funds with Other Governmental Subsidies. 

This Notice is available online at: http://www.hud.gov/ offices/cpd/affordablehousing/lawsandregs/notices/ 

cpd9801.pdf. 

Property and Ownership Requirements 

There are a number of property-related requirements that must be met when using HOME funds for 

homebuyer assistance, including a principal residence requirement, maximum purchase price limits, forms 

of ownership, and property standards. 

Principal Residence 

Eligible properties must be the purchaser’s principal residence. These might include a single-family 

property (one- to four- units), a condominium unit, a cooperative unit, or a manufactured home. The PJ 

may choose to enforce the principal residence requirement by a deed restriction or covenant running with 

the land. This requirement can also be incorporated into the loan documents and the written agreement 

between the purchaser and the PJ. 

Maximum Purchase Price or After Rehabilitation Value 

The maximum purchase price may not exceed 95 percent of the median purchase price of homes purchased 

in the area. In the case of a purchase-rehabilitation project, the value of the property after rehabilitation 

may not exceed 95 percent of the area median purchase price for that type of housing. The afterrehabilitation value estimate should be completed prior to the investment of HOME funds. 

There are two options that PJs have for determining the 95 percent of the median purchase price limits. 

Most PJs opt to use the FHA Section 203(b) Mortgage Limits. These limits are available from the HUD 

Single Family Homeownership Center that serves that PJ. The limits are also made available online at the 

HOME Program website at: http://www.hud.gov/offices/cpd/ 

affordablehousing/programs/home/limits/maxprice.cfm. 

PJs also have the option of conducting a specialized market analysis that meets certain requirements 

established by HUD. The HUD Field Office must review the PJ’s market analysis and conclusions. These 

requirements can be found in the HOME Final Rule at 24 CFR 92.254 (a)(2)(iii). 

Eligible Forms of Ownership 

Any of the following forms of ownership are allowable: 

• Fee simple title to the property; 

• A 99-year leasehold interest in the property; 

• A 50-year leasehold interest in trust or restricted Indian lands; 

• A 40-year leasehold interest, for insular areas; 

• C ondominiums; 

• Participation in a cooperative or mutual housing project that constitutes homeownership under state 

law; 

• Community land trust; 

23
• Lease-purchase; 

• Manufactured housing; and 

• An equivalent form of ownership approved by HUD. 

Note that life estates are not an eligible form of homeownership. 

When HOME funds are invested in a homeownership unit, the ownership interest must be subject only to 

the restrictions on resale required by the HOME Program (discussed below), mortgages, deeds of trust, or 

other liens or instruments securing debt on the property as approved by the PJ. Any other restrictions or 

encumbrances must not impair the marketable nature of title or the ownership interest. 

When HOME funds are used to help purchase a manufactured home, the additional requirements apply. 

First, at project completion, the manufactured housing must be connected to permanent utility hook-ups. 

Second, the home must be located either on land that is owned by the unit owner, or on land for which the 

unit owner has a lease for a period equaling or exceeding the applicable period of affordability. See LongTerm Affordability below for more on affordability periods. 

Property Standards 

Depending on the type of property being assisted, different levels of property standards apply. The PJ or 

designated program administrator must inspect each assisted unit for compliance with the applicable 

standard. 

• Acquisition. If no rehabilitation or construction is planned, the acquired housing must meet state 

and local housing quality standards and code requirements. If there are no such standards or codes, 

the property must meet Section 8 Housing Quality Standards. 

• Rehabilitation and New Construction. Housing that is being 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 one of the national model 

codes.2 New construction must also meet the Model Energy Code. 

• Rehabilitation after Acquisition. The housing must be free from all health and safety defects 

before occupancy, but no later than six months after the property ownership is transferred. Not later 

than two years after ownership transfer, the housing must meet all required property and 

rehabilitation standards. 

• Manufactured Housing. Newly constructed manufactured housing units must comply with the 

National Manufactured Home Construction and Safety Standards found at 24 CFR 3280, and 

commonly known as the “HUD Code.” In addition, PJs must ensure that manufactured units are 

installed as required by applicable state and local codes. In the absence of such codes, PJs must see 

that units are installed according to the manufacturer’s specifications. Existing manufactured 

housing that is acquired, or acquired and rehabilitated, must meet local standards and codes 

established for manufactured housing. 

The HOME Program requires a property inspection for every unit of housing assisted with HOME funds to 

determine that the property meets the applicable standards. 

The purpose of these standards and inspections is to ensure 

that assisted units are safe, decent, and sanitary premises for 

its occupants. 

Most private lenders will require an 

appraisal to assess the value of the property. 

This cannot substitute for a property 

inspection by the PJ or the PJ’s contractor to 

determine that the property meets applicable 

property standards and code requirements. 

Private lenders, on the other hand, typically require an 

appraisal of the property, which generally includes a site 

visit, or limited inspection of the property. An inspection for 

appraisal purposes, however, is not the same as a property 

24
Since the income determination processes 

for a private lender and a PJ have different 

purposes, it is critical that the PJ verify 

applicant income itself, and not rely on 

lender representation. 

inspection. Appraisers assess and inspect the property 

for the purpose of determining its value only. Appraisers 

are not trained to evaluate a property for code 

compliance. Regardless of whether or not the lender 

conducts an appraisal, PJs must conduct a property 

inspection to ensure the property meets the appropriate 

codes or standards. 

Homebuyer Eligibility 

To be eligible for HOME assistance, a prospective purchaser’s income must not exceed 80 percent of the 

median household income for the area, as adjusted by family size and established by HUD. HUD issues 

updated income limits annually which can be found at the HOME Program website at http://www.hud.gov/ 

offices/cpd/affordablehousing/programs/home/limits/ income. 

PJs may choose from three definitions of income to determine individual eligibility: 

• Section 8 Program definition for annual gross income (for homeownership, the value of a principal 

residence may be excluded from assets); 

• IRS definition of adjusted gross income as defined for reporting on IRS Form 1040; or 

• Annual income as defined by the U.S. Census Long Form. 

The PJ can use any one of these three definitions for its homebuyer programs. However, it should use the 

same definition consistently for all applicants of the same homebuyer program. The definition need not be 

the same income definition used for other HOME activities. To facilitate the income determination 

process, HUD provides online training and an “Income Calculator” online at 

http://www.hud.gov/offices/cpd/ affordablehousing/training/calculator/index.cfm. 

Regardless of the income definition used, a PJ must review source documents such as wage statements, 

interest statements, and/or unemployment compensation statements to determine annual income. Eligibility 

determinations are based on anticipated income for the next twelve months. The previous year’s tax return 

alone does not reflect next year’s earnings, and it does not constitute adequate income source 

documentation. 

The HOME regulation establishes the timing for qualifying HOME-assisted homebuyers as incomeeligible. In the case of a contract to purchase existing housing, the homebuyer must be income-eligible at 

the time of purchase. In the case of a contract to purchase housing yet to be built, the potential homebuyer 

must be income-eligible when the contract is signed. In the case of a lease-purchase agreement, the 

potential homebuyer must be income-eligible when the lease-purchase agreement is signed. If more than 

six months elapse from the time the potential homebuyer is income-certified (e.g., a buyer was incomecertified at program intake but needed more than six months to complete buyer education, find a property, 

and execute a sales contract), the program administrator must recertify income. 

Lenders also determine a borrower’s income, and verify it with source documentation. However, PJs and 

private lenders have different purposes for determining income eligibility, and therefore have different 

methodologies. The PJ’s income determination is done for the purpose of determining whether or not a 

buyer meets the definition of low-income in order to establish eligibility for HOME assistance. The 

lender’s income evaluation is done to determine if the buyer has sufficient income to carry the mortgage. 

While the incentive for HOME income qualification is to document that income is below a certain 

threshold, applications to lenders may seek to maximize income in order to qualify for a larger mortgage. It 

is a good business practice for PJs to obtain and review copies of lender application packages to be sure an 

applicant’s information is consistently reported. 

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Long-Term Affordability 

One of the purposes of the HOME Program is to increase the supply of affordable housing over time. PJs 

can choose to meet this goal either by restricting the resale of HOME-assisted properties to other lowincome buyers (“resale option”), or by recapturing HOME funds to assist other buyers and/or properties 

(“recapture option”). 

Periods of Affordability 

In order to ensure that property assisted with HOME funds remains affordable for some period of time, the 

HOME Program sets affordability periods that control the sale of the homeownership property to a 

subsequent owner. These periods are based on the amount of HOME assistance provided for the property, 

as follows: 

• If the HOME assistance is less than $15,000, the affordability period is no less than five years. 

• If the HOME assistance is between $15,000 and $40,000, the affordability period is no less than ten 

years. 

• If the HOME assistance is greater than $40,000, the affordability period is no less than 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. These provisions should be 

explained to homebuyers in simple terms, and included as part of the closing documents so that a 

homebuyer fully understands his/her obligations during the affordability period and how the recapture or 

resale provisions will be applied upon the sale of the property or when the property ceases to be the 

homebuyer’s principal residence. Some PJs execute a separate written agreement with homebuyers to 

evidence that the homebuyer understands and agrees to the recapture or resale requirements. 

For more information on selecting and structuring a resale or recapture option, see Using HOME Funds for 

Homebuyer Programs: Structuring Resale and Recapture, HUD-1674-CPD. To get a copy of this model 

program guide, see HUD’s Office of Affordable Housing Programs online library at: http://www.hud.gov/ 

offices/cpd/affordablehousing/library/modelguides/ index.cfm. Further guidance on resale and recapture 

provisions is provided in HUD’s HOMEfires Volume 4, Number 4, October 2003 and Volume 5, Number 5, 

November 2003. These HOMEfires can also be downloaded from HUD’s Office of Affordable Housing 

Programs online library at: http://www.hud.gov/offices/ 

cpd/affordablehousing/library/homefires/index.cfm. 

Recapture Option 

Recapture is a mechanism for the PJ to recover all or a portion of the direct HOME assistance if the initial 

HOME-assisted buyer decides to sell the house during the affordability period. The recapture option is 

often the simplest for most PJs. 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 

26
interest rate buy-downs). This does not include any “development subsidy” which is the amount of HOME 

assistance in excess of fair market value that is used to produce the unit. 

If sale to a new owner occurs during the affordability period, the PJ can choose to: 

• Recapture the entire amount of the direct HOME assistance, or, when HOME funds are loaned, any 

outstanding loan balance on a HOME loan. 

• Forgive a portion of the direct HOME assistance based on the length of time the homebuyer has 

occupied the home, in relation to the period of affordability. For example, the PJ might forgive 50 

percent of the assistance amount for an owner who sold the home halfway through the period of 

affordability. 

• Share the net proceeds, when the proceeds are insufficient to repay the full amount of HOME 

assistance. Net proceeds are the sales price minus the repayment of any non-HOME loan balance 

and closing costs that were financed by the homeowner. Net proceeds may be divided 

proportionally based on the ratio of the HOME assistance to the sum of the homeowner’s investment 

(downpayment and any documented capital improvements financed by the homeowner) plus the 

HOME assistance, as follows: 

HOME Assistance 

HOME Assistance + 

Homeowner Investment 

x Net Proceeds = HOME 

Recapture 

• Permit the repayment of the homeowner’s investment in full before any HOME funds are 

recaptured. The homeowner’s investment includes any downpayment and documented capital 

improvements financed by the homeowner. The HOME subsidy is then repaid only to the extent that 

net proceeds are available. 

The PJ must deposit all recaptured HOME funds in the PJ’s HOME Investment Trust Fund account, unless 

the PJ permits a state recipient, subrecipient, or CHDO to retain recaptured funds in accordance with a 

written agreement. Recaptured funds must be used for HOME-eligible activities, in accordance with all 

HOME requirements. Recaptured funds are generally treated as program income, with the exception that 

ten percent of the recaptured funds may not be used for eligible administrative and planning costs since 

recaptured funds are a return of the original HOME investment (and the ten percent administrative funds 

have already been calculated on the original allocation). 

For more information on this issue, see HUD Notice CPD-97-9, HOME Program Income, Recaptured 

Funds, Repayments and CHDO Proceeds, available online at: 

http://www.hud.gov/offices/cpd/affordablehousing/lawsandregs/notices/cpd9709.pdf. 

Under the recapture option, 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. 

Resale Option 

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). 

27
• Sale to an income-eligible homebuyer. This 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. (See discussion of Homebuyer Eligibility earlier in this chapter.) 

— 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 lowincome 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. To do this, the PJ must undertake a market analysis and document 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). The PJ’s methodology and 

conclusions must be reviewed and approved by HUD. If the PJ continues to offer homeownership 

assistance for housing in the neighborhood, it must periodically update the market analysis to verify 

the original presumptions and continued affordability. 

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 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. 

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. The development subsidy is the difference between 

the cost to develop housing and the fair market value. This type of subsidy is generally used in markets 

where the development costs exceed market value. Note that when the resale option is used, the 

affordability period is based on the total amount of HOME assistance invested in the housing and not on 

the amount of the development subsidy. 

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. The $5,000 difference between the $45,000 sales price and the 

$50,000 construction loan represents a development subsidy provided to the developer. 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. 

28
Sometimes HOME assistance is structured so that both a development subsidy and assistance to the 

homebuyer are provided. When this happens, 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 (e.g. downpayment and closing cost assistance). 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. 

HUD’s HOMEfires Volume 5, Number 4 dated October 2003 provides more guidance. This HOMEfires

can be downloaded from HUD’s Office of Affordable Housing Programs online library at: 

http://www.hud.gov/offices/cpd/ affordablehousing/library/homefires/index.cfm. 

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 mechanism approved by HUD. It is also a good business practice to use these 

mechanisms to enforce the recapture provisions as well. 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. PJs should be aware, however, that in 

the event of a foreclosure, while a deed or other restriction is terminated for purposes of clearing title, the 

PJ’s obligation to provide affordable housing for the period of affordability is not terminated. The PJ’s 

failure to meet this obligation may result in the repayment of HOME funds. Chapter 4, Understanding 

Loan Servicing, describes what happens when a HOME-assisted property is foreclosed, and what steps a 

PJ can take to ensure continued affordability, rather than repay HOME funds. 

Special Considerations for Two- to Four-Unit Properties 

For owner-occupied two- to four-unit properties, the long-term affordability requirements depend on which 

units are designated HOME-assisted units. When both the homeowner’s unit and one or more rental units 

are assisted, the PJ has the option of imposing resale or recapture provisions on all assisted units, including 

the rental units. If resale restrictions are used, the affordability requirements on all assisted units continue 

for the period of affordability. If recapture restrictions are used, the affordability requirements on the 

assisted rental units may be terminated at the discretion of the PJ, upon the recapture of the HOME 

investment. If only the rental units are assisted, then the housing is not HOME-assisted homebuyer housing 

and only the HOME rental requirements apply. The PJ should consult with HUD for more guidance on 

providing homebuyer assistance with HOME funds in owner-occupied two- to four-unit properties. 

Written Agreements 

A PJ must execute a written agreement before any HOME funds are committed or disbursed to any entity 

or recipient, including homebuyers. If a state recipient, subrecipient, or contractor is administering any, or 

all, of the HOME program on behalf of a PJ, it must also enter into a written agreement with the PJ, as well 

as any entity or recipient to whom it, in turn, disburses funds. The written agreement is an important 

enforcement tool. The PJ should work with local counsel to ensure that the written agreement is a legally 

enforceable document. The agreement should include provisions to compel compliance with HOME rules 

and other applicable Federal, state and local requirements and establish penalties for failure to comply. 

Written agreements can vary, depending on the role of the entity or recipient of HOME funds, and the 

scope of the activity or project undertaken. Every written agreement should concisely define the 

29
relationship of the PJ with the entity or recipient of HOME funds, and clearly state all the conditions under 

which HOME funds are being provided. These conditions include the principal residency requirement and 

the recapture or resale requirements that apply when the property is sold. The written agreement should 

identify any reporting and record-keeping requirements that must be met, as well as the corrective actions 

that the PJ will take if non-compliance occurs. 

Record-keeping 

Generally, the PJ and any entity administering HOME activities on its behalf, must establish and maintain 

records sufficient to document that program requirements are being met. 

The following project records must be maintained, including: 

• Description of each project; 

• Location (with a map); 

• Form of assistance; 

• Number and identification of units or tenants, if any, associated with HOME; 

• All sources and application of funds; 

• Evidence of compliance with maximum and minimum subsidy limits, and evidence of a subsidy 

layering review, where applicable; 

• Evidence of compliance with property standards and lead-based paint requirements; 

• Evidence of income eligibility of assisted buyer, and tenant(s), if applicable; 

• If refinancing is provided, evidence of compliance with established guidelines and/or requirements; 

• Evidence of compliance with maximum property value limits; 

• A copy of loan document(s); 

• A copy of all documents that ensure the property remains affordable throughout the period of 

affordability, such as a deed restriction or covenant running with the land, and/or documents that 

convey the provisions of the PJ’s resale and/or recapture requirements; and 

• Evidence that such documents have been recorded. 

In addition to the requirements imposed by the HOME Program that are discussed in this section, PJs are 

encouraged to establish their own requirements for record-keeping and reporting by their partners, to 

facilitate monitoring and compliance. 

Table 2-3 provides a summary of the key homebuyer rules and provides guidance on how to document 

compliance. 

Other Federal Requirements 

In addition to the above requirements, the use of HOME funds for homebuyer activities often triggers other 

Federal regulations. Table 2-4 provides a summary of these other Federal requirements. 

30
Table 2-3 

Summary of Key Homebuyer Rules and How to Document Compliance 

Key Home Requirement Documentation 

Eligible Participants

Owner Income • Gross income <80% of median income 

based on the upcoming 12 months. 

• Income is defined by one of three 

options: Section 8 annual income; annual 

income under Census long form; or 

adjusted gross income under IRS Form 

1040. 

• Include completed application in project 

file. 

• Include source documentation (wage 

statements, interest statements) in 

project file. 

Owner Occupancy • Applicant must purchase property and 

maintain it as his/her principal 

residence. 

• Applicant should sign a clause on the 

application form certifying that the 

property is the principal residence; 

include copy in project file. 

Ownership of Property • Applicant must obtain ownership of the 

property through: 

⇒ Fee simple title; 

⇒ 99-year leasehold interest (50 year 

leasehold on trust or restricted Indian 

land or 40 year interest for insular 

areas); or 

⇒ Ownership/membership in a 

cooperative, condominium, or mutual 

housing project (if recognized by state 

law). 

⇒ For manufactured housing, fee simple 

title or a leasehold interest in the land 

that equals or exceeds the applicable 

affordability period. 

• Include title search documentation in 

project file. 

• Include copy of deed, leasehold interest, 

or other ownership document in project 

file. 

Eligible Property

Property Type • Eligible property types include: 

⇒ One-to-four-unit property; 

⇒ Condominium unit; 

⇒ Cooperative or mutual housing unit, if 

recognized by state law; and 

⇒ Manufactured or mobile home. 

• If 2-4 units, indicate status of non-owneroccupied units in the written agreement 

with the owner; include copy in project 

file. 

• If non-owner units were assisted with 

HOME funds, include written agreement 

with homeowner regarding rental 

requirements in project file; reference 

the property's rental monitoring file. 

Property Location • Property must be located within 

geographic area of the PJ. 

• Include completed application in project 

file.

• Application should show address.

HOME Minimum and 

Maximum Thresholds 

• An average of a minimum of $1,000 in 

HOME funds must be invested in each 

assisted unit. 

• The maximum HOME assistance per unit 

as determined by HUD. 

• Maintain records in project file 

demonstrating that the average per-unit 

HOME investment exceeded $1,000. 

• Maintain records indicating total HOME 

assistance did not exceed maximum 

provided by HUD in project file. 

31
Key Home Requirement Documentation 

Property Value • Sales price must not exceed 95% of the 

area median purchase price. 

• If rehabilitating property, after 

rehabilitation value must not exceed 95% 

of the area median purchase price. 

⇒ Use 203(b) limits; 

 OR 

⇒ Establish local limits and obtain HUD 

approval. 

• If using local purchase price limits, 

document data used to determine limits 

as well as evidence of HUD approval; 

include in program files. 

• Document method for determining value; 

include in the project file. 

• Include copy of sales price or value 

estimate in project file. 

Eligible Property (Continued)

Property Standards • If acquisition only, property must meet 

either local codes/standards or Section 8 

Housing Quality Standards (HQS). 

• If rehabilitation, property must be free of 

safety and health hazards prior to 

occupancy or within 6 months of property 

transfer, whichever is sooner. 

• Also, if rehabilitation, property must meet 

local rehabilitation standards and 

applicable codes (local codes/standards 

or one of the nationally accepted codes) 

within 2 years of transfer. 

• New construction must meet local 

codes/standards or one of the nationally

accepted codes and the Model Energy

Code. 

• Document local code or model code 

used; include in program files. 

• Maintain written rehabilitation standards; 

include in program files. 

• Include inspection report or certification 

by inspector in project file. 

• Keep inspection checklist and work writeup in project file. 

• Include checklist indicating compliance 

with Model Energy Code requirements for 

new construction projects in project file. 

Eligible Activities • Acquisition, acquisition and rehabilitation, 

and new construction. 

• Document all expenditures; include in 

project file. 

Long-Term Affordability 

Affordability Period 

Resale/Recapture 

Property must be subject to either resale or 

recapture revisions for the period of 

affordability. 

• Resale: future sale of property must be 

to and affordable to low-income buyer, at 

an affordable price. 

• Recapture: portion or all of direct 

assistance to buyer must be recaptured 

at time of sale. 

Resale: written agreement , mortgage 

and/or note and deed restriction, covenant 

or other enforcement mechanism restricting 

future sales; include copy in project file. 

Recapture: written agreement, mortgage or 

note showing formula by which funds will be 

recaptured and any enforcement 

mechanism; include copy in project file. 

32
Table 2-4 

Other Federal Requirements 

Other Federal 

Requirements 

Apply to Homebuyer 

Programs? 

Special Issues/ 

Considerations 

Regulatory Citations 

and References 

Non-Discrimination and Equal Access Rules 

Fair Housing and 

Equal Opportunity 

Yes. PJs must affirmatively further 

fair housing. 

Particular attention should be 

paid to signs of discrimination 

in sale of properties. 

• 24 CFR 92.202 

• Title VI of Civil Rights 

Act of 1964 (42 U.S.C. 

2000d et. seq.) 

• Fair Housing Act (42 

U.S.C. 3601-3620) 

• Executive Order 11063 

(amended by Executive 

Order 12259) 

• Age Discrimination Act 

of 1975, as amended 

(42 U.S.C. 6101) 

• 24 CFR 5.105(a)

Affirmative 

Marketing 

Yes, for all projects of 

five or more HOMEassisted units. 

PJ must adopt affirmative 

marketing requirements and 

procedures. 

• 24 CFR 92.351 

Handicapped 

Accessibility 

Yes. New projects must be 

designed and constructed in 

accordance with applicable 

standards. 

Rehabilitated properties may 

require modifications. 

• Section 504 of the 

Rehabilitation Act of 

1973 (implemented at 

24 CFR Part 8) 

• For multifamily buildings 

only, 24 CFR 100.205 

(implements the Fair 

Housing Act)

Employment and Contracting Rules

Equal Opportunity 

Employment 

Yes. Contracts and subcontracts 

for more than $10,000 must 

include language prohibiting 

discrimination. 

• Executive Order 11246 

(implemented at 41 CFR 

Part 60) 

Section 3 Economic 

Opportunity 

Yes, if amount of 

assistance exceeds 

$200,000 OR contract or 

subcontract exceeds 

$100,000. 

Include Section 3 clause in 

contracts and subcontracts.

• Section 3 of the Housing 

and Urban Development 

Act of 1968 

(implemented at 24 CFR 

Part 135) 

Minority/Women 

Business Enterprises 

Yes. PJ must develop procedures 

and include in all contracts 

and subcontracts. 

• Ex ecutive Orders 11625, 

12432 and 12138 

• 24 CFR 92.351 

• 24 CFR 85.36(e) 

33
Other Federal 

Requirements 

Apply to Homebuyer 

Programs? 

Special Issues/ 

Considerations 

Regulatory Citations 

and References 

Davis-Bacon Yes, if construction 

contract includes 12 or 

more units that are 

HOME-assisted. 

If applicable, requirements 

apply to the whole project, not 

just the HOME-assisted units. 

Include language in contracts 

and subcontracts. 

Requirements do not apply to 

volunteers or sweat equity. 

• 24 CFR 92.354 

• Davis-Bacon Act (40 

U.S.C. 276a - 276a-5) 

• 24 CFR Part 70 

(volunteers) 

• Copeland Anti-Kickback 

Act (40 U.S.C. 276c) 

• Contract and Safety 

Standards Act (40 

U.S.C. 327-332) 

• HUD Handbook 1344.1 

Federal Labor 

Standards 

Conflict of Interest Yes. PJs should ensure compliance 

in-house and when using 

subrecipients. 

• 24 CFR 92.356 

• 24 CFR 85.36 

• 24 CFR 84.42 

Debarred 

Contractors 

Yes. PJs should check HUD list of 

debarred contractors. 

• 24 CFR Part 5 

Environmental Requirements

Environmental 

Reviews 

Yes. Categorically excluded 

projects are not subject to 

58.5 (existing or under 

construction). 

Buildings to be constructed in 

the future require a 

compliance review. 

• 24 CFR 92.352 

• 24 CFR 58.35 (b)(5) 

• National Environmental 

Policy Act (NEPA) of 

1969 

Flood Insurance Yes. Must obtain flood insurance if 

located in a FEMA designated 

100-year flood plain. 

Community must be 

participating in FEMA’s flood 

insurance program. 

• Section 202 of the Flood 

Disaster Protection Act 

of 1973 (42 U.S.C. 

4106) 

Lead-Based Paint Yes for pre-1978 units. Notices to purchasers and 

tenants. 

Visual assessment must be 

performed. 

Paint stabilization must be 

completed (if applicable). 

Safe work practices and 

clearance. 

Provisions included in all 

contracts and subcontracts. 

• 24 CFR 92.355 

• Lead Based Paint 

Poisoning Prevention 

Act of 1971 (42 U.S.C. 

4821 et. seq.) 

• 24 CFR Part 35 

• 982.401(j) (except 

paragraph 

982.401(j)(1)(i)) 

Relocation Yes. Required notifications to 

tenants. 

Required language in offers 

and contracts for acquisition 

of property. 

• 24 CFR 92.353 

• Uniform Relocation 

Assistance and Real 

Property Acquisition 

Policies Act of 1970 

(URA) (42 U.S.C. 4201-

4655) 

• 49 CFR Part 24 

34
Other Federal 

Requirements 

Apply to Homebuyer 

Programs? 

Special Issues/ 

Considerations 

Regulatory Citations 

and References 

• 24 CFR Part 42 (subpart 

B) 

• Section 104(d) “Barney 

Frank Amendments” 

Unqualified aliens Yes. Federal benefits to unqualified 

aliens is limited. 

• Title IV of the Personal 

Responsibility and Work 

Opportunity 

Reconciliation Act of 

1996 (42 USC 601 et 

seq.) 

Uniform Administrative Requirements 

Cost Principles Yes. Must follow uniform approach 

for determining allowable 

costs under Federal grants, 

and other agreements. 

• For PJs and other 

governmental entities, 

OMB Circular A-87 

• For nonprofit 

organizations, OMB 

Circular A-122 

Other uniform 

administrative 

requirements 

Yes, applies to programs 

administered by PJ, 

subrecipient, or state 

recipient. 

Must follow uniform 

requirements for financial 

management, procurement, 

record-keeping, and close-out 

procedures. 

• PJs and other 

governmental entities, 

certain provisions of 24 

CFR Part 85 

• For nonprofit 

organizations, certain 

provisions of 24 CFR 

Part 84 

End Notes 

1 Additional loan guarantee requirements can be found at 24 CFR 92.205(b)(2). 

2 The national model codes used by the HOME Program are: 

• Uniform Building Code (issued by CABO); 

• National Building Code (issued by BOCA); and 

• Standard (Southern) Building Code (issued by SBCCI). 

Since the promulgation of the HOME regulation, the national model code-issuing agencies have merged 

to form the International Code Council (ICC). The model codes used for the HOME Program are no 

longer being updated; in their stead, the ICC has adopted the International Building Code. HUD will 

consider whether changes to the HOME regulations incorporating the International Building Code are 

appropriate. 

3 See Footnote 2, above, for a discussion of the national model codes. 

35
Chapter 3: 

 Understanding Loan Underwriting and Origination 

Chapter 3 presents key concepts that ground loan underwriting practices and explores how 

lenders apply these concepts with standard documents, procedures, and information technology. 

The chapter highlights what the industry’s norms suggest for HOME program design.

Loan Origination 

The loan origination process determines whether the assisted borrower qualifies for mortgage credit. This 

section discusses how lenders weigh the different elements of mortgage risk. The key to profitable 

mortgage lending is pricing loans according to their risk of default. Default risk is tied to three things: 

• Willingness to pay (evidenced by credit history); 

• Ability to pay (income vs. expenses); and 

• Collateral (downpayment amount, home value). 

Each of these is reviewed carefully during the process of loan underwriting. 

Evaluating Credit 

Methods for determining a borrower’s willingness to honor credit obligations have changed over the past 

ten years. In the past, mortgage lenders collected basic credit information and then decided for themselves 

whether there were too many unexplained late payments in a given period of time. To assist first-time 

homebuyers with little credit history of any kind, lenders would sometimes consider the timeliness of 

utility or rent payments. 

During the 1990’s, credit scores became the dominant way of 

assessing an applicant’s willingness to pay. Credit scores 

predict the borrower’s likelihood of default. The use of 

credit scores has grown rapidly over the past ten years as 

their contribution to lender profitability has become clear. 

A credit score is calculated by a mathematical equation that 

evaluates information from the borrower’s credit report. 

Independent analytical firms developed the equations used to 

generate the scores by comparing actual performance of past 

loans with actual borrower credit records. The accuracy of 

credit scores has been verified using a similar approach, by 

scoring large portfolios of existing loans and then comparing 

score predictions to actual loan performance. 

Credit scores are assigned to assess the probability of loan default. Scores can range from 300 to 850, 

worst to best. Approximately 75 percent of all scored borrowers have a credit score of 650 or better. 

There is no single score that serves as a cutoff for a borrower’s eligibility for favorable interest rates 

because each lender determines how to use the score in combination with other factors in its evaluation of a 

borrower. Generally borrowers with credit scores of 650 or higher are typically able to qualify for 

favorable interest rates, if all other aspects of the loan application meet standard guidelines. 

During the 1990’s, credit 

scores became the dominant 

way of assessing an 

applicant’s willingness to 

pay. Credit scores predict 

the borrower’s likelihood of 

default. 

36
Credit scores are based solely on credit information, not employment, income, or other factors. Heaviest 

weight is given to the applicant’s previous credit performance, and total indebtedness. Scores change 

monthly based on new information from credit bureaus. 

Evaluating Collateral 

Lenders need to know the true market value of the home they will accept as collateral. Appraisers rely 

heavily on the “comparable sales” method to determine market value of single-family residential 

properties. Recent sales of similar homes in nearby locations indicate what the subject property would be 

worth on the open market. Sale prices for comparable properties are adjusted to reflect specific differences 

from the subject property. 

Because an appraisal is such a central part of the lending process, and because it necessarily involves a 

number of judgment calls by the appraiser, appraiser certification and qualification are hot topics for 

mortgage lenders, secondary market investors, and housing finance regulators. (Note, an appraisal does 

not replace the need for a home inspection to verify compliance with HOME property standards. This 

issue is discussed in more detail in Chapter 2.) 

Just as information technology has transformed the lender’s evaluation of borrower credit, automated 

appraisal is doing the same for collateral review. Large databases of comparable sales are compiled for a 

given market area. Statistical analysis and geographic information systems then process the data and 

estimate a value for the subject property. Automated appraisal is particularly well-suited for suburban 

markets where there are large numbers of relatively uniform properties. Its estimates are not as reliable in 

rural markets or diverse in-city locations. 

The size of the borrower’s downpayment is related to collateral evaluation. It represents the financial stake 

the borrower has invested in the property. Lenders have traditionally relied on downpayments as an 

incentive for borrowers to persevere during lean times and save their investment rather than default. The 

reliability of automated credit scoring has reduced lender reliance on collateral and downpayment. Special 

mortgage programs with 97 percent or even 100 percent loan-to-value ratios are now commonplace. These 

were almost unheard of 15 years ago. 

However, a counter-trend could be in the making to restore some of the importance of downpayment and 

collateral. Recent research shows that borrowers had much higher default rates in markets where home 

prices were volatile than did borrowers with identical credit scores in stable real estate markets. This 

suggests that home value and downpayment are still critical parts of mortgage loan risk. 

Evaluating Ability to Pay 

Lenders review a household’s income and expenses to understand an applicant’s ability to pay the 

proposed loan payment. Two ratios are calculated. The first or “front-end” ratio compares the loan payment 

(which includes principal, interest, taxes, and insurance) 

to gross income. The second or “back-end” ratio 

compares the loan payment plus installment and revolving 

debt to gross income. Common rules-of-thumb say that 

households should spend no more than 28 to 33 percent 

of their income on housing, and no more than 36 to 38 

percent on total debt. Special programs sometimes enable 

the ratios to rise substantially. For example, FHA loans 

permit higher ratios. 

PJs that pre-screen potential borrowers may 

find that their assessment of borrower 

qualifications is more liberal than the one 

eventually applied by lenders. This can be 

especially true for lenders who are 

unfamiliar with typical household budget 

profiles in the particular market a HOMEfinanced program is designed to serve. 

37
Automated Underwriting 

The analysis of willingness to pay, ability to pay, and collateral is usually facilitated by loan underwriting 

software, and the resulting process is called “automated underwriting.” The substitution of computerassisted judgment for the human element has been estimated to save as much as $650 per loan. Still, even 

automated systems refer some loans for human judgment. 

How Automated Underwriting and Credit Scoring Affects HOME 

Applicants 

There is both good and bad news for low- and moderate- income homebuyers in the trend toward 

automated mortgage loan decisions. On the positive side, credit scores have been found not to correlate 

with borrower income. Confidence in sophisticated technology can enable lenders to push the envelope 

further on risk elements like borrower expense-to-income ratios. 

On the down side, HOME-assisted buyers may be disproportionately affected by technical problems in the 

process used to develop credit scores. The very poor, the less educated, and those living in central cities 

may be under-represented in credit bureau data. This under-sampling could cause less valid credit scores 

for these groups of borrowers, according to some researchers. 

PJs should counsel borrowers well in advance about the importance of their credit score, and applicants 

should be advised that even the act of applying for credit may reduce credit scores. Anyone can get a copy 

of his or her credit report and credit score online at www.myfico.com. There is a fee for this service. 

Some HOME-assisted borrowers will need the benefit of a traditional application review. Elimination of 

automated underwriting and credit scoring is a selling point for some new mortgage programs for 

affordable ownership sponsored by major secondary market enterprises. PJs should ensure that partner 

lending institutions have skills in traditional, hands-on loan underwriting. Participation in affordable 

housing programs and active portfolio lending programs may be good indicators of such skills. 

Fees for Loan Origination and Closing Costs 

Lenders charge borrowers an origination fee (sometimes called a “transaction fee”) to cover the costs of the 

transaction, including preparing documents, making credit checks, and analyzing the loan file. Fees can 

range from as little as 0.5 percent to as much as 2 percent, but they are typically between one to 1.25 

percent of the loan amount. Borrowers who provide complete documentation and have solid credit may be 

able to negotiate a lower fee, especially with larger loan sizes. On the other hand, when lenders commit to 

make special, hands-on efforts to qualify borrowers, origination fees may be somewhat higher. 

PJs may be able to negotiate lower origination fees for HOME-assisted borrowers. Some lenders might 

offer lower fees as a public-purpose concession. Other lenders might be willing to provide optimal terms if 

the PJ can reduce some of a lender’s work to facilitate the transaction, such as pre-screening borrowers and 

collecting necessary documentation before meeting with the lender. Without such bargaining points, PJs 

may encounter lenders who argue for higher origination fees due to the smaller loans and more demanding 

underwriting requirements of some HOME borrowers. 

Borrower costs typically range from two to five percent of the loan. Closing costs include home inspection, 

appraisal, advance payment of homeowner’s insurance, property taxes, real estate transfer taxes, title 

insurance, escrow fees, and attorney’s fees. Closing costs may range from $2,000 to $3,000, in addition to 

the loan origination fee and any points. Sellers also have closing costs. These include the real estate 

agent’s commission, and in some areas, the attorney’s fee, transfer taxes, and title insurance costs. 

“Points” are cash payments up front that buy reductions in the loan interest rate. They are called points 

because they are expressed as percentage points of the loan amount. Comparison shopping is important, as 

38
lenders may not charge uniformly for rate reductions. For buyers who have the cash, and who plan to 

remain in the house for at least four years, paying points can save money in the long run by reducing 

interest costs, while also lightening the load the mortgage places on the family’s monthly budget. However, 

for many HOME-assisted buyers, cash is short. For them, a higher interest rate is the price of completing 

home purchase sooner. 

It may be possible to negotiate with sellers to get assistance with closing costs, including points. Lenders 

usually permit at least three points to be paid by the seller to the borrower at closing. Borrowers should 

expect to see such assistance reflected in a higher sale price, which in turn must always be justified by the 

appraisal. 

Some lenders, especially subprime lenders, bundle insurance products into a loan closing. Credit life 

insurance is sometimes offered to new borrowers. This type of insurance is similar to term insurance in 

that it pays the mortgage if the borrower dies. Typically, the sole beneficiary of credit life insurance is the 

lender. The insurance coverage is reduced as the loan is re-paid; however, the premiums paid remain fixed 

throughout the life of the loan. 

All of the costs that are likely to be incurred in the purchase of the home, including those discussed in this 

section, must be summarized and presented to the homebuyer as early in the loan origination process as 

possible. A standard form, the “Good Faith Estimate of Settlement Costs” (also known as the “HUD 1”), 

presents the complete estimate of cash requirements. It is required by law to be prepared and provided to 

the homebuyer so that he or she is aware of all the likely costs that will be incurred in the transaction. 

Credit Enhancement 

What Is Credit Enhancement? 

Credit enhancement provides extra financial strength to fortify the overall quality or “credit” of a loan. In 

other words, credit enhancement increases the likelihood that the lender will eventually recover principal 

and interest. It is usually structured as mortgage default insurance, or simply, “mortgage insurance.” 

Mortgage insurance covers lenders in the event of loan default. It is typically required for loans having less 

than a 20 percent downpayment. The borrower pays the premiums. This typically adds about seven-tenths 

of one percent to the mortgage interest rate. Mortgage insurers have recently begun to adjust premiums 

based on borrower credit scores. Mortgage insurance is a significant expense, but without it borrowers 

must wait until they can accumulate a full 20 percent downpayment. 

Private firms, as well as FHA and VA, provide mortgage insurance. Market share is 50 percent private; 37 

percent FHA; and 13 percent VA. A few states also have mortgage insurance programs. 

Private mortgage insurance (PMI) providers are rated for their financial strength. Mortgage insurance from 

recognized sources helps to transform an individual mortgage loan into an investment-quality asset. That, 

in turn, channels global capital to the U.S. home mortgage market, eliminating capital shortages and 

driving down interest rates. 

From the borrower’s point of view, credit enhancement is no cure-all. First, it costs money and reduces 

loan affordability. Secondly, not everyone qualifies for credit enhancement. Mortgage insurers must earn a 

profit by assuming risks that lenders will not take by themselves. That means they must be selective. Credit 

enhancement companies make their own evaluation of acceptable risk, in effect adding a second borrower 

qualification process—and it can be a tough one. 

Private mortgage insurers are required by law to cancel insurance when a loan is paid down to 78 percent 

of original home value. 

39
Using HOME-Assistance to Overcome Qualification 

Hurdles Responsibly 

Potential low- and moderate-income borrowers may have trouble passing one or more of the three 

underwriting hurdles described earlier, credit, collateral, and ability to pay. The HOME regulation allows 

PJs a great deal of flexibility, enabling them to structure assistance to best fit the needs of the borrowers 

they are trying to serve. The type of HOME subsidy provided to the prospective purchaser depends on the 

type of underwriting hurdle(s) that the prospective borrower faces: 

• Assisting with the homebuyer’s downpayment and closing costs; 

• Reducing the mortgage amount to reduce monthly payments; and/or 

• Overcoming credit-related hurdles. 

The subsidy choice depends on the characteristics and needs of potential borrowers, interests and 

requirements of participating lenders, and capabilities and resources of the PJ. 

Downpayment and Closing Cost Assistance 

For many potential homebuyers, the biggest barrier to homeownership is raising cash for downpayment 

and closing costs. While households may have a steady income that would support monthly payments, they 

do not have enough savings to cover the upfront costs of buying a home. The HUD 1 is very useful for 

evaluating the borrower’s cash needs. 

Downpayment and closing cost assistance is usually structured as a grant or a deferred payment loan. If 

downpayment/closing cost assistance is the only assistance the PJ provides, then a deferred payment loan, 

rather than a grant, may be advisable. If all the terms of the loan are met, the loan may be forgiven. A 

deferred payment loan is repaid (in whole or in part) at a stated point in the future, often in stages over 

time, or at the end of some specified period, such as the sale of the home, or upon violation of any 

conditions attached to the loan. A deferred payment loan provides a means of enforcing the principal 

residency and resale/recapture requirements of the HOME Program, and also potentially recycles HOME 

funds. 

Gap Financing 

Other potential homebuyers lack the income to cover the monthly cost of principal, interest, property taxes, 

and insurance (PITI). The difference between the loan amount their maximum affordable payment would 

cover, and the actual mortgage amount required, is called the “gap.” HOME funds structured as “gap 

financing” can reduce monthly loan payments and eliminate the gap. Probably the most efficient way to 

reduce the size of a borrower’s monthly payment is to provide the homebuyer with a grant, or more likely, 

a second loan on favorable terms, to reduce the first mortgage principal they must borrow. Another option, 

less common and usually more expensive, is an interest rate buy-down. With a rate buy-down, the PJ 

provides funds directly to the lender, who then reduces the interest rate on the borrower’s loan. 

PJs can structure gap financing in a number of ways. For example, HOME loans can be deferred payment, 

interest only, or fully amortizing at a low interest rate. Gap financing reduces the first mortgage lender’s 

risk by reducing the loan-to-value (LTV) ratio. If the first mortgage LTV is reduced to 80 percent, the 

lender will not require mortgage insurance. This has the benefit of eliminating both the borrower’s monthly 

premium and the need to qualify under mortgage insurance guidelines. In addition, gap financing can 

overcome “appraisal gaps” when the costs of purchasing and rehabilitating exceed a home’s postrehabilitation value. 

40
When structuring gap financing, PJs will encounter the concept of “lien priority.” A lien is a claim on the 

property, such as a mortgage. A lender with a first lien on the property (also known as “first position”) 

has first claim on foreclosure sale proceeds, a lender with a second lien has second claim, and so on. If 

nothing remains after superior liens are paid, subordinate lien-holders must pursue other, more uncertain 

legal remedies to collect from the borrower. Generally, HOME gap financing is structured as a secondary 

loan to the privately financed loan. Often the HOME loan is structured as a “soft second,” meaning that it 

is forgivable at some point in time. 

Credit-Related Hurdles 

For many potential homebuyers, credit-related hurdles can be the most difficult barrier to address. When 

lenders are unwilling to make loans due to the applicant’s credit profile, PJs can pledge HOME funds to 

guarantee a single loan or a pool of loans. A loan guarantee is a written promise to pay the lender some 

percentage of the outstanding principal balance in the event the borrower defaults. HOME funds can be 

deposited into a guarantee account held by the lender. For example, for a group of mortgages totaling $2 

million, $200,000 could be set aside to cover losses (10 percent). HOME regulations require that the 

amount placed in a loan guarantee account be based on a reasonable estimate of the loan default rate. 

HOME funds in the guarantee account may not exceed 20 percent of the total outstanding principal balance 

guaranteed. Note: compensating bank balances funded by HOME are ineligible for use as a loan 

guarantee. 

PJs will need to negotiate the particulars of the guarantee with the first mortgage lender. Key questions to 

consider include:

• For what period will the guarantee remain in effect? 

• How many defaults will it take to exhaust the fund? 

• What criteria will be used for claim payment? 

Because of the financial complexities involved, PJs should carefully review the HOME Program rules on 

loan guarantees found at 24 CFR 92.205(b)(2) and plan on obtaining experienced technical assistance 

when structuring a guarantee fund. 

Education and counseling provide applicants with information, tools, and support to repair credit records. 

By providing financial support for homebuyer and credit education courses, PJs can ensure that applicants 

who are approved are truly ready for homeownership, and that credit counseling is available to those who 

are screened out due to poor credit. 

Loan Closing 

Loan closing is the legal process that transfers the home’s title to the buyer, transfers loan funds and 

downpayment to the seller, and makes the home legally enforceable collateral for the lender. The closing 

usually occurs in the office of the lender’s attorney. The buyer receives the deed to the property, and 

executes a mortgage note pledging to repay the loan with the home as collateral. The HUD 1 statement of 

settlement costs lists all payments and credits due from the buyer and the seller at closing. 

At loan closing, HOME funding is also legally executed. Liens, deed restrictions, recapture agreements, 

repayment provisions, and any other formal agreements related to the HOME funds must be included in the 

loan closing documents. Upon completion of the closing, PJs should be sure all executed legal documents 

are publicly recorded. For most PJs, these documents will provide the primary, if not sole, legal 

mechanism for enforcing long term affordability restrictions. Without recording the documents, these 

enforcement tools will be ineffective. Further, given the importance of the loan closing process, PJs should 

41
establish a process for auditing loan closing files periodically to ensure quality control of these essential 

documents. 

Loan closing is a good opportunity for PJs to reconfirm that borrowers understand their obligations, and, 

where applicable, are made aware of the availability of post-purchase counseling. 

End Note 

1 See myFICO, a consumer division of Fair Isaac Corporation. Credit Scores—Credit Education. 

Available at: http://www.myfico.com/myfico/CreditCentral/ScoringWorks.asp [Last updated 2004.] 

42
Chapter 4: 

Understanding Loan Servicing 

Chapter 4 presents key concepts that ground loan servicing practices and explores how lenders 

apply these concepts with standard documents, procedures, and information technology. The 

chapter highlights the PJ’s responsibilities and what the industry’s norms suggest for HOME 

Program design.

Servicing’s Place in the Lending Industry 

Servicing a loan is usually a routine process of collecting payments—but not for the borrowers who get 

into financial trouble, cannot make timely payments, and stand to lose the home they have worked hard to 

buy. Given the high level of automation that characterizes loan servicing, the PJ’s challenge is to have 

ongoing systems in place to break through the routine when necessary to maintain the homeowner’s equity 

and credit standing. 

As discussed in Chapter 1, loan servicing functions are increasingly separated from loan originations. 

Specialized servicing organizations may be responsible for hundreds of thousands of home mortgages 

scattered throughout the country. This means that departments and organizations with no connection to the 

parties who worked with the applicant to originate the loan typically perform loan servicing. 

Effective and appropriate servicing of higher-risk loans will detect payment difficulties early and avert 

default. Government sponsored secondary market enterprises have issued benchmark guidelines for how to 

service affordable loans. They require that delinquency counseling be offered the first time a borrower is 

delinquent, and that early delinquency counseling be continuously available for seven years after loan 

origination. Counseling must be documented in a monthly status report on each delinquent borrower. 

For PJs, the challenge is to get attentive servicing for low-income borrowers in a marketplace that strives 

for standardization. With good working relationships with both lenders and servicers, and some help from 

technological advancements, PJs can find ways to see that low-income borrowers get the attention they 

need. 

Matching Servicing Routines to Borrower Risk Using 

Computer Models 

Loan servicers who deal with thousands of mortgages see many delinquencies every month, but only a few 

ever reach the foreclosure stage. In the early stages it is hard to know which borrowers are simply a week 

late on their payments, and which ones are heading into greater trouble. 

Once again, information technology plays a key role in the modern mortgage business. Computer software 

uses statistical models to predict delinquent borrowers’ 

repayment behavior. The scores generated by the models give 

servicers a tool to determine which delinquencies are likely to 

persist, so they can intervene at the earliest stages. This helps 

servicers manage workloads by directing attention to 

borrowers most likely to benefit. If delinquency persists, 

software also identifies when servicers should begin lossmitigation procedures. Foreclosure prevention strategies are 

suggested too. 

Servicing software generates scores 

based on risk using factors like:

• Mortgage and property 

characteristics; 

• Lo an-to-value ratio; 

• Pay ment history; 

• Current real estate market 

data; and 

• Econom ic conditions. 

43
What does technology-based servicing intervention mean for low-income borrowers? Before servicing 

software was developed, servicers had to rely on hunches to predict who could benefit from workout plans 

and avoid foreclosure. Proponents of servicing software say the old method made servicers less inclined to 

invest resources to help borrowers, since they had no reliable way of knowing whether their intervention 

would bring results. Ideally, technology can direct scarce counseling resources efficiently. Skeptics worry 

that predictive models may not account for the sacrifices that low-income homeowners may be willing to 

make to keep their homes. 

Meeting Special Needs of HOME Borrowers 

Servicers have a major stake in avoiding costly foreclosures, and they will work with borrowers to prevent 

it, either directly or behind the scenes. Affordable loans may require more attentive servicing than 

conventional loans. Low-income borrowers are at higher risk of financial crises that can impact their ability 

to make timely payments. Low-income borrowers may also have less experience with financial institutions, 

making them less confident about the system and less savvy about how the whole complex process works. 

The most effective servicing for HOME-assisted borrowers is likely to result when servicers, lenders, 

counselors, and PJs work together to prevent mortgage defaults. Although the servicing organization may 

have the earliest knowledge of payment difficulties, it may not be in the best position to help. Financially 

troubled borrowers are generally best served by entities with which they have established a relationship. 

When servicers identify potential problems with a loan, a pre-established network of support for the 

borrower can be invaluable. PJs may choose to play coordinating or organizing roles in creating such 

support. 

Lending programs can be designed so the originator remains responsible for working with the borrower if 

payments are missed. Alternatively, in the event that servicing rights are sold, sale documents can require 

that the originating lender or the PJ be notified of delinquencies. A partnering counseling agency might 

also be engaged as soon as a borrower falls behind, to work one-on-one with the borrower to get back on 

track. 

Post-purchase counseling can provide HOME borrowers with an ongoing network of support, month-in 

and month-out, as loan payments are made. It gives borrowers somewhere to turn for advice if financial 

trouble arises, before the first payment is missed. If default becomes unavoidable for a HOME-assisted 

borrower, post-purchase services can help the borrower understand the options and determine the best 

course of action. One alternative to an inevitable foreclosure is a “deed in lieu of foreclosure.” Often 

referred to simply as a “deed in lieu,” it is a resolution of default in which the owner signs the property 

over to the lender, and in return the lender agrees not to pursue the balance of what is owed. A deed in lieu 

is an appropriate resolution when there is little equity in the property and the lender wants to avoid the time 

and expense of formal foreclosure proceedings. A deed in lieu typically has less negative impact on the 

borrower’s credit rating than a traditional foreclosure. However, as discussed later in this chapter, the PJ 

may still be responsible for ensuring that the required long-term affordability requirements are met. 

Guarding Against Predatory Lending 

The post-purchase support mechanisms that can reduce defaults can also deliver continuing education 

about preserving home equity and rejecting predatory loan marketers. Some HOME borrowers live in older 

or urban neighborhoods that are particular targets for abusive lenders. Because housing in these 

neighborhoods typically requires more repair, borrowers are vulnerable to high-cost, equity-stripping 

home-improvement loans. It is important to remind HOME borrowers regularly about the dangers of 

predatory lending and how it can deplete the equity they have struggled to build. Borrowers should be alert 

to marketing pitches and loan features that signal caution, including: 

44
• Door-to-door outreach, especially in conjunction with offers to finance home improvements; 

• Offers of cash, since predatory lenders often market “cash-out” loans for debt; 

• Loan flipping, or repeated refinancings with high up-front fees that are rolled into each transaction; 

and 

• Balloon payments that require financing at a fixed date, subjecting the borrower to the risk of rising 

interest rates or the absence of any refinancing at all. 

Post-purchase counseling can advise borrowers how to tap home equity prudently. 

PJ Responsibilities During the Affordability Period 

The PJ’s primary responsibilities during the long-term affordability period are to ensure compliance with 

the applicable resale/recapture provisions if the property is sold and to track the timely payment of any 

HOME funded loan. It is also a good idea for the PJ to verify that the property remains the principal 

residence of the assisted homebuyer. These provisions are largely self-enforcing through the loan 

documents, deed restrictions and/or lien that accompany HOME assistance. A well-crafted written 

agreement is another important enforcement mechanism. The PJ should also consider using other tools for 

tracking program compliance during the long-term affordability period. 

Monitoring Principal Residence Requirement 

The homebuyer must reside in the HOME-assisted unit as his/her principal residence. Many PJs choose to 

enforce this requirement through loan documents, deed restrictions, written agreements, or other 

enforcement mechanisms. One of the following techniques can also help a PJ ensure that permanent 

residency is maintained: 

• Annual Certification of Residency. Send a certification letter to the homebuyer via certified return 

receipt mail. 

• Insurance Policies. Require homeowners to list the PJ as a loss payee on their homeowner’s 

insurance for the duration of the affordability period. The insurance carrier will notify the PJ 

whenever a claim is made, the policy is renewed, or it expires. These notifications state whether the 

home is an owner-occupied or rental property. 

• Utility Bills. Check periodically with local utility companies to determine the name and address of 

record. 

Monitoring Repayments of HOME Assistance 

For repayable HOME assistance, PJs or their collection agents must establish tracking systems to log 

payments and calculate the remaining HOME principal due. Substantial program income is at stake in 

programs using deferred payment or year-by-year forgivable loan structures. To protect this program 

income, PJs should ensure that loan documents and/or deed restrictions require repayment upon sale, or 

when the home ceases to be a principal residence, consistent with the written resale or recapture agreement. 

Regardless of whether or not the PJ services debt, the PJ should arrange to be notified by the first mortgage 

lender in the event of payment problems. This not only helps build good relations with the lender for future 

collaboration, but also enables intervention by the PJ or affiliated partners to assist financially troubled 

borrowers. Notification also provides data on loan performance to help design future programs. 

Monitoring Resale and Recapture Provisions 

45
If a HOME-assisted borrower elects to sell during the affordability period, the PJ’s written agreement 

establishing the resale or recapture provisions will guide who can buy the property, what funds must be 

repaid, and how long the affordability restrictions continue, as explained in Chapter 2. The deed restriction 

or other enforcement tool that is recorded by the PJ should ensure that the PJ is notified when a sale is 

pending. The techniques described above for monitoring the principal residency requirement are also 

useful in alerting the PJ when a sale has occurred. 

PJ Responsibilities in the Event of Foreclosure 

In the event of foreclosure, or transfer in lieu of foreclosure, the HOME rule allows the lender to take the 

property without the affordability restrictions. This permits a lender to get clear title to the property, in 

order to recoup its investment to the greatest extent possible. However, a foreclosure does not relieve the 

PJ of its responsibility to ensure that the HOME-assisted property remain affordable throughout the period 

of affordability, even after a foreclosure occurs. The implications for the PJ vary, depending on whether 

the PJ uses a resale or recapture agreement to preserve affordability, and depending on what recapture 

provisions are established. It is important that the PJ establish mechanisms so that it will be notified of 

pending foreclosures. 

In the event that the owner of record1 before the foreclosure (or transfer in lieu of foreclosure) obtains an 

ownership interest in the project or property after foreclosure, the original affordability restrictions are 

revived. 

Foreclosure of Property with Resale Restrictions 

Under the resale option, a PJ commits to keeping a 

specific HOME-assisted property affordable for the 

duration of the affordability period through the 

sale of the property to a low-income family, or a 

family that is “presumed” to be low-income. If a 

lender forecloses on the property, the 

affordability restrictions may terminate. 

However, termination of the affordability 

restrictions does not satisfy the requirement that 

the property remain affordable for the long-term 

affordability period, as established by the resale 

agreement. 

Determining the Amount to be Repaid in the Event 

of Foreclosure

The following scenarios illustrate how to determine the 

repayment amount in the event of foreclosure: 

1. A PJ provides $5,000 in downpayment assistance to a 

homebuyer. The assistance is forgiven on a pro-rata 

basis over the five-year affordability period. The 

property is foreclosed in the owner’s third year of 

ownership. The PJ must repay $5,000 to its HOME 

Trust Fund account because none of the HOME funds 

have been repaid by the homeowner. If, after 

foreclosure, these funds are not available to the PJ as a 

subordinate lien holder, the PJ must use its own nonfederal funds to repay the entire $5,000 to the HOME 

Trust Fund account. 

2. If this same downpayment assistance is provided in #1, 

above, but it is structured as a loan, repayable in equal 

amounts over five years, the PJ must repay $2,000 to 

the HOME Trust Fund account since by the third year, 

the homeowner has already repaid $3,000 of the loan 

to the PJ (assuming the homeowner had made the 

required payments) as program income. 

3. If the PJ also provided development assistance to 

this property in the form of a $10,000 grant to the 

developer, the PJ must repay an additional 

$10,000 to the HOME Trust Fund account since 

no repayments of the development assistance 

have been made by either the developer or the 

homeowner. 

Unless the property is located in an area where 

there is a presumption of affordability (as 

described in Chapter 2), in order to meet its 

obligation to keep the unit affordable to a lowincome buyer, the PJ must ensure that after 

foreclosure or transfer in lieu of foreclosure the 

subsequent buyer of the property is low-income. 

Since the lender takes ownership of the property 

upon foreclosure, the PJ will need to work with 

the lender to see that this happens. If the new 

buyer receives HOME assistance to purchase the 

property, a new period of affordability can be 

established based on the amount of the direct 

HOME assistance to the new homebuyer, or the 

original affordability period can be retained. If 

no new HOME assistance is provided, the new 

46
low-income homebuyer must be willing to assume the remaining term of the original long-term 

affordability period in order for the PJ to meet its obligation. 

If the HOME-assisted housing fails to meet the affordability requirements for the full period of 

affordability, the PJ must repay the appropriate HOME Trust Fund account. The PJ is responsible for 

repaying the funds whether or not it is able to recover any portion of the HOME investment from the 

owner, project developer, state recipient, subrecipient, or community housing development organization 

(CHDO). The amount of HOME funds that must be repaid is based on the total amount of HOME funds 

invested in the project (development subsidy and direct homebuyer assistance), but varies, depending on 

the form of subsidy provided. If the HOME funds were provided in the form of an amortizing loan, the PJ 

must repay the outstanding principal balance (since a portion of the original loan has already been repaid to 

the PJ and reprogrammed as program income). If HOME funds were provided as a grant, or a nonamortizing or deferred payment loan, the amount of repayment is the full amount of HOME assistance 

invested in the property (since no payments on the loan have been made to the PJ). 

When a PJ uses a resale provision, it is prudent for the PJ to take proactive steps to prevent foreclosure, 

given the PJ’s potential liability in the event of foreclosure. When negotiating the original financing terms 

with the lender, PJs should consider ways to prevent foreclosure, and negotiate terms that give it preemptive rights to purchase the housing before foreclosure or transfer in lieu of foreclosure, such as a 

purchase option or the right of first refusal. The PJ might also negotiate a notification clause requiring the 

lender to notify the PJ when payments are late or missed, or at the first signs of risk of foreclosure. The PJ 

can intervene with these borrowers on behalf of the homeowner, particularly if the PJ offers a postpurchase counseling program. The PJ might also be able to work with the lender to develop a mutually 

satisfactory foreclosure workout plan. Since a foreclosure can be expensive for the lender, the lender may 

be open to negotiating favorable terms with the PJ. 

Foreclosure of Property with Recapture Provision 

When there is a foreclosure of a property with a recapture provision, the PJ or family may or may not have 

a recapture obligation, depending upon the type of recapture provision the PJ has chosen (see Chapter 2 for 

a discussion of the different options a PJ has when using a recapture provision). 

Unlike homeownership housing that is subject to a resale restriction, when homeownership housing is 

subject to a recapture restriction, the terms of the recapture provisions determine the amount of HOME 

funds that must be repaid when a property is foreclosed: 

• If the recapture agreement provides for shared net proceeds, the amount that must be repaid is the 

homeowner’s required share of the net proceeds (if any) from the foreclosure sale. Net proceeds are 

the funds remaining after the first lien is satisfied. If there are no net proceeds, then there is no 

recapture obligation. 

• If the recapture agreement requires the homebuyer to repay the entire amount of the HOME 

assistance, or an amount reduced pro-rata based on the time the homebuyer has owned and occupied 

the housing measured against the affordability period, the amount that must be repaid is the amount 

required by the recapture agreement. If the agreement requires the recapture of the full amount of 

the HOME assistance, the repayment obligation is the full amount, regardless of the amount of any 

net proceeds after foreclosure. If the agreement requires the recapture of a pro-rated amount of the 

original HOME assistance, then the repayment obligation is the pro-rated amount of the original 

HOME assistance, regardless of the amount of any net proceeds after foreclosure. 

• If the PJ is unable to recapture the required amount of funds at foreclosure, the PJ must use its own 

funds to make up the difference. 

PJs that are concerned about the possibility of repaying funds in the event of a foreclosure may wish to 

consider adopting recapture provisions that base the recapture amount on the net proceeds available from 

47
the sale of the property rather than on the entire amount of the HOME investment. If the written agreement 

bases the recapture amount on net proceeds and there are no net proceeds from the foreclosure, repayment 

is not required and HOME requirements are considered to be satisfied. 

Failure To Comply With Home Requirements 

If, during the long-term affordability period, the HOME-assisted property fails to comply with the 

applicable HOME requirements for reasons other than foreclosure (such as sale to a non-eligible 

homebuyer or the failure of the original homebuyer to occupy the property as his/her principal residence), 

the PJ must repay the entire outstanding balance of the HOME investment (development subsidy and direct 

assistance to the homebuyer), regardless of whether it is able to recapture any funds from the homeowner. 

When Funds Must Be Repaid 

Funds that must be repaid by the PJ to the HOME Trust Fund account because of the failure of the HOMEassisted property to comply with all of the HOME requirements for the entire affordability period (as a 

result of foreclosure or from other causes) must be repaid as follows: 

• If the HOME funds were initially disbursed from the PJ’s HOME Investment Trust Fund Treasury

account, they must be repaid to the Treasury account. 

• If the HOME funds were initially disbursed from the PJ’s HOME Investment Trust Fund local

account (i.e. program income or recaptured funds), they must be repaid to the local account. 

HUD may waive the repayment requirement for good cause, although this is done infrequently. A PJ can 

show good cause by demonstrating to HUD that it has made a good faith effort to preserve the unit for 

affordable housing. Waivers might also be available in the event the foreclosure or non-compliance was 

the result of an extreme circumstance, such as the destruction of the property by a fire, or other disaster. 

Note that once a PJ has recaptured HOME funds in accordance with a written recapture agreement, it has 

met its obligation to preserve affordable housing, and the property is no longer subject to any affordability 

requirements. 

End Note 

1 This would include the owner of record, or those with whom the former owner has or had family or 

business ties. 

48
Chapter 5: 

Maximizing the PJ’s Relationship with Private and 

Public Lenders 

Chapter 5 discusses how to create a win-win partnership with private and public lenders, keeping 

the lender’s perspective of the HOME Program in mind. The chapter reviews the HOME 

Program’s real and perceived advantages and disadvantages, and describes how PJs can recruit 

private and public lending partners. Armed with information from this chapter, PJs will be able to 

make sound finance-related decisions when choosing and assessing their program delivery 

systems and allocating administrative tasks. The chapter concludes by summarizing specific 

finance issues that PJs should consider when designing programs that might be familiar to 

HOME staff, but are unusual for private lenders.

Choosing a Delivery System 

Homebuyer programs come in all shapes and sizes. The range includes downpayment assistance programs 

where PJs receive lender referrals of pre-approved buyers with sales contracts in hand, all the way to 

intensive, client-focused programs in which the PJ or a nonprofit partner work with buyers for months to 

prepare loan packages. Certain core components are common across the whole range. 

Pre-Application 

Pre-application has three purposes. It attracts potential homebuyers, pre-qualifies them to determine if they 

are likely to qualify for financing, and offers access to counseling services to strengthen loan applications 

and prepare for ownership. 

• Marketing and Outreach. Especially for programs seeking to serve populations with little exposure 

to the home buying process, good marketing is essential. Marketing efforts should use multiple 

channels to produce a sizeable pool of inquiries. It may take 15 or more applications to generate one 

qualified loan package. 

 For example, a nonprofit partner can attract applicants with print or radio ads, notices in paycheck 

envelopes, or fliers distributed by local schools and faith-based organizations. Local realtors who 

have been briefed about the program can refer clients. Participating lenders can include the program 

in their marketing materials. Loan officers can refer applicants 

who do not qualify for conventional loans. The application 

should include an 

applicant privacy 

release so 

information can be 

shared among 

partners. 

• Pre-Qualification. After an individual has expressed interest, the 

next step is pre-qualification. Pre-qualification involves 

reviewing unverified information to make a preliminary, nonbinding assessment of eligibility, and sometimes estimating the 

approximate level of HOME support that may be needed. The 

partner managing the pre-qualifying process should be able to 

quickly see whether an applicant is ready to apply for financing, 

needs to work on budgeting and credit counseling, or has longterm credit issues. The partner should have strategies in place 

for applicants in each category. 

• Counseling/Education. Many potential applicants may need to improve their credit before applying 

for a loan. As discussed later in this chapter, credit counseling and education programs can help 

49
potential applicants repair credit, accumulate savings, and develop sound family budgets and debt 

payment habits. Homeownership counseling can help prepare potential applicants for the 

responsibilities of homeownership. 

Application 

The formal application documents income so the PJ can determine HOME Program income eligibility and 

the lender can determine whether to provide financing. A wise idea is to have one entity coordinate the 

process and serve as the single point of the contact for the applicant. 

In some programs, after determining that an applicant is HOME-eligible, the PJ will assemble an 

application for the participating lender. Packaging the application involves ensuring that paperwork is 

complete and meets both the PJ’s and the lender’s requirements. Consistent packaging of documents 

supports a smooth loan underwriting process. 

Underwriting and Selection 

Underwriting is the process by which the PJ and the participating lender review the completed loan 

application package and determine whether or not to approve the loan request. The result is a determination 

of how large a mortgage the first lender is willing to provide, if any, and how much HOME assistance and 

other gap financing will be needed. 

Loan Closing 

PJs that provide downpayment or closing cost 

assistance often cover a fixed percentage of costs, with 

the balance coming from the borrower’s own 

resources. Obtaining an advance copy of the Good 

Faith Estimate of Settlement Costs (discussed in 

Chapter 3) enables PJs to determine how much 

assistance is warranted, and ensures that checks can 

be cut in time for closing. 

Loan closing takes place when the buyer 

and seller execute mortgage documents 

that complete the home purchase. 

Depending on local preferences and the 

type of assistance being provided, some 

PJs simply deliver a check and a copy of 

loan documents to the closing agent, while 

others send a representative to each 

closing. 

Post-Closing 

Experienced managers of homebuyer programs know the job is not finished at loan closing. In cases where 

repayment of HOME assistance is required, the PJ or program administrator will need to establish loanservicing procedures (see Chapter 4). Post-purchase counseling and early intervention during the first one 

or two years are critical to support good payment habits. 

Defining Roles 

An honest assessment of the institutional capacity and motivation of each partner involved is necessary 

when establishing responsibilities and processes for a homebuyer program. Such an assessment can help 

determine which partners will take on which of the responsibilities outlined above. 

Different partners have different areas of expertise. Nonprofit organizations typically are strong in 

outreach, counseling, and pre-screening applicants. Generally, the program administrator, either the PJ or a 

nonprofit organization, will pre-screen prospective homebuyers, arrange for homebuyer counseling 

sessions, and possibly help with finding a home. An astute mortgage lender can match applicants with 

50
appropriate loan programs. The mortgage lender will generally assume loan processing and underwriting 

responsibilities, including credit checks, income and debt verifications, and appraisals. Secondary market 

investors often define the extent of underwriting flexibility, and local or regional staff of secondary market 

enterprises can play important roles in program design. Servicing lenders collect payments, escrow taxes 

and insurance, devise workout plans for delinquent borrowers, and institute foreclosure proceedings when 

necessary. The PJ’s role will vary depending on staff resources and expertise available, but will always 

include a loan-by-loan review to verify compliance with key HOME requirements, such as the income 

eligibility of homebuyers. 

The PJ’s Responsibilities 

The PJ is ultimately accountable to ensure that all the 

requirements of the HOME Program are met. If it 

has engaged with a partner, such as a state recipient, 

subrecipient, or contractor to administer all or a part 

of its homebuyer program, it must make sure that its 

partner is fully knowledgeable about the 

requirements. In addition to communicating these 

requirements to its partners verbally, PJs should 

communicate these requirements in writing. Ideally, 

the mandatory written agreement between the PJ and its partner will describe, in simple and understandable 

language, all the terms and conditions under which HOME funds are provided. Prudent PJs also include 

specific reporting and record-keeping requirements in their written documents to facilitate their efforts to 

document compliance with program rules. 

PJs must be specialists in HOME Program 

compliance and must monitor their partners to 

ensure that program requirements are met. 

Whatever the nature of its partnership with 

nonprofit organizations and lenders, the PJ 

retains accountability for HOME compliance. 

See Chapter 2 for a discussion of the key HOME 

requirements for homebuyer programs. 

Chapter 2 provides a summary of the key requirements that apply in the operation of a homebuyer 

program. These include: 

Remember, when a PJ uses a 

contractor to administer all 

or part of its HOME 

Program, that contractor 

must be procured in 

accordance with 24 CFR 

Part 85.36. 

1. Borrower income eligibility; 

2. Property and ownership requirements; 

3. Eligible activities and cost items; 

4. Propert y standards; 

5. Long-term affordability (resale and recapture); 

6. Maximum purchase price; 

7. Maximum and minimum per unit subsidy; 

8. Written agreements; and 

Soft second mortgages, deed 

restrictions, non-traditional credit 

histories, and other common features of 

affordable homeownership programs 

can be problematic for lenders 

unfamiliar with this part of the market. 

Consider asking the participating lender 

to designate certain loan officers who 

will be trained in the HOME-assisted 

program. Lenders may also choose to 

focus loan availability in specific 

locations convenient to potential 

homebuyers.

9. Record-keeping. 

Lender Relationship 

As part of its program design, the PJ must decide how to structure its 

relationship with the mortgage lender(s). Some PJs allow borrowers to 

choose any lender, while others establish standards for lender participation 

(transaction fees, origination points, etc.) and meet periodically with lenders 

to explain the program, including its procedures, forms, eligibility criteria 

and subsidies, as well as the lender’s role in the process. In the most formal 

(and least common) lender relationship, a lender is selected competitively, in 

accordance with government procurement procedures. The partners 

negotiate and agree on underwriting and servicing criteria, loan terms, 

marketing, and terms of HOME assistance, and execute a lender agreement 

51
to confirm terms. If a lender or secondary market investor has established a special loan product for the 

HOME-assisted program, the agreement may include a lender commitment of funds to the program. 

Assessing and Recruiting Lending Partners 

Local vs. Regional or National Lenders 

Locally-based lending institutions may respond to the opportunity to gain recognition in their own 

communities, although they might lack experience with specialized approaches to funding affordable 

housing. Major lenders are more likely to have dedicated affordable housing and community development 

staff. Sometimes these more sophisticated institutions give priority to programs in their home office cities. 

Community development financial institutions (CDFIs) and development credit unions tailor their services 

to low- and moderate- income borrowers and generally have substantive expertise matching appropriate 

resources to individual households. However, there are relatively few CDFIs nationwide, and many 

operate on a relatively small scale. It may be necessary to supplement their financial or staff capacity with 

private lender resources. 

Traditional credit unions may have strong ties to their membership group, typically an employer. This 

provides a useful basis for marketing and outreach when the PJ is interested in reaching the same group. 

Marketing Reach 

One of the key services a partner lender can provide is marketing. PJs can find out if the institution’s 

network of offices serves its program area conveniently, and whether loan marketing staff would be willing 

to meet with applicants after-hours. PJs should look for lender partners with staff who are familiar with the 

specific customer groups the PJ especially wants to reach. 

PJs may also want to inquire about the commission structure for loan marketers. Will the typically smaller 

mortgage loans of a HOME-assisted program yield a higher percentage commission? If not, expect 

marketers to have less interest in the PJ’s program. 

Of course, innovative marketing ideas are one of the clearest signals of an institution’s commitment to 

getting the word out about affordable lending. For example, one major lender’s marketing staff succeeded 

in penetrating previously unserved markets by paying church members to recruit new accounts from its 

tight-knit community. 

Track Record 

Lenders who have originated sizeable portfolios of specially underwritten affordable housing loans have 

experience in lending to those the HOME loans are designed to reach, and have demonstrated a 

commitment to this clientele. On the other hand, dramatic announcements of loan commitments do not 

always result in loan production. PJs are cautioned to check out any potential partner’s actual track record. 

The more background a potential partner has in the affordable lending business, the better. Whether it is an 

intended role or not, PJs should assume that lenders will counsel clients to some extent. Experienced 

lenders can direct potential HOME-assisted borrowers to the programs that make the most sense for their 

particular circumstances. 

52
Checklist 

To evaluate whether a new lender is well-versed in affordable housing lending, determine if the institution 

has participated in other types of affordable housing ventures, such as: 

• Making Federal Home Loan Bank affordable housing programs available; 

• Investing in low-income housing tax credit projects; 

• Providing construction financing for affordable rentals; 

• Having officers on boards of housing nonprofits; 

• Originating loans for state housing finance agency programs; 

• Providing FHA mortgage insurance or VA/RHS loan guarantee; 

• Making mortgage loans for manufactured housing; 

• Participating in portfolio or secondary mortgage market programs for affordable housing; or 

• Providing funding, staff, or meeting space available to support buyer education. 

HOME’s Impact on Lender’s Profitability 

As PJs develop partnerships with mortgage lenders, it is important for the PJ to be able to understand the 

lenders’ perspective. Good intentions and regulatory incentives for making HOME-assisted loans will 

leverage only so much. PJs must be prepared to articulate how their proposed program will affect the 

lender’s bottom line, positively and negatively. 

Unusual loans that do not conform to the standard pattern can disrupt the production process and cost 

lenders money. For example, HOME second mortgages must be reviewed to be sure they meet 

requirements of the lending institution and its secondary market partners. HOME-assisted applicants 

sometimes require traditional underwriting, which is more costly than standard automated underwriting. 

And in general, small mortgage loans take as much or more time to originate than large ones, yet the 

percentage-based origination fee structure means they yield less revenue to the lender. 

Loan servicing may require more careful monitoring and follow-up for HOME-assisted borrowers. As with 

origination fees, servicing revenue is keyed to loan size, making HOME loans somewhat less profitable to 

service. On the plus side, to the extent that second mortgages whose balances are forgiven automatically 

over time add to borrower equity, they give borrowers an extra reason to make timely payments on the first 

mortgage. Defaults on such HOME-assisted loans may be lower than on standard loans, reducing lender 

costs. 

PJs that are able to take steps to make the HOME-assisted loan program resemble a mini-production line, 

are able to talk the lender’s language. Consider concentrating HOME loans with a smaller number of 

originating partners so they can generate an efficient scale of production. This benefits PJs because it 

enables lender partners to build expertise in HOME procedures. It simplifies the PJ’s monitoring efforts, 

too. 

What the HOME Program Offers Lenders: Using Your 

Leverage to Get the Best Deal 

PJs have some meaningful benefits to offer participating lenders. If these are properly articulated, PJs may 

find they have some leverage when negotiating lending partnerships. All of the lender benefits derive from 

the central fact that HOME assistance helps lenders make loans that they otherwise would not be able to 

approve. 

53
Lenders are constantly seeking ways to expand their market while managing risk. By reducing loan-tovalue ratios, making monthly payments more affordable, or providing loan guarantees, HOME assistance 

can reduce lender risk in serving the low- and moderate-income market. HOME assistance means new 

borrowers who otherwise would never have done business with the lender. And once a family has 

borrowed for a mortgage, the lender has an opportunity to “cross-sell” other banking services, such as 

checking or savings accounts, to the new customer. 

Lenders who participate in HOME-assisted homebuyer programs are also likely to receive credit towards 

Community Reinvestment Act (CRA) goals. The risk-absorbing benefits of HOME assistance help lenders 

balance their obligations to regulators under CRA with their obligations to be profitable and prudent. 

Similarly, the Home Mortgage Disclosure Act (HMDA) tracks the location, income, race, and ethnicity of 

mortgage applicants, and makes all data available for public scrutiny. 

Some lenders track their performance on these measures very actively in order not to be surprised by 

charges of “redlining.” Likewise, housing advocates use special software to watch lender performance. In 

many markets, HOME-assisted borrowers are likely to improve lenders’ HMDA statistics. 

Participation in HOME-assisted homebuyer programs opens up new partnership possibilities for lenders. 

Lenders benefit from the outreach efforts of the program, which can amount to free advertising. They can 

refer unqualified applicants to pre- and post-purchase counseling partners instead of simply having to turn 

people away. In addition, the nonprofit or for-profit developer that becomes a partner with a bank on a 

small homebuyer project today could bring additional, and potentially larger deals to the lender in the 

future. 

Negotiating Tips 

Armed with the knowledge that their HOME assistance provides potentially attractive benefits to lenders, 

PJs can effectively negotiate lending partnerships if they bear in mind the following strategies: 

• Know the Lender. Develop an understanding of the institution, its role in the community, the 

programs it offers, how decisions are made, and who makes the final decisions. 

• Obtain Commitment from the Top. Start negotiations from the top, both within the PJ’s own 

organization and the lending institution. Aim to negotiate a comprehensive program that will make 

loan-by-loan discussion unnecessary. Work out the details of the program after the general 

commitments have been made. 

• Address the Lender’s Needs. Understand the lender’s goals and objectives and offer the agency’s 

expertise where appropriate (for example, buyer education, post-purchase support for borrowers, 

nonprofit linkages). 

• Know What Is and Is Not Negotiable. Lenders are by nature risk averse, and they must answer to 

regulators and secondary investors for the quality of their lending. Determine up front what options 

the lender will and will not discuss. 

• Do Not Overplay the Hand. As discussed earlier in this chapter, HOME-assisted loans may not be 

as profitable to the lender as other loans. If the mortgage market is hot (e.g., the refinancing boom of 

the early 2000’s), do not expect lenders to be as responsive. 

• Compromise. The key to negotiating anything is compromise. Keep objectives at the forefront of all 

discussions and keep a flexible approach to meeting those objectives in order to make the program 

work for the PJ and for the lender. 

54
What to Ask For 

PJs can make the most out of a lending partnership if they carefully think through their negotiating goals. 

These goals will vary according to the resources available to the PJ, the target population for the program, 

overall market conditions, and the motivations of partner lenders. Some typical negotiating points include 

the following: 

• Use the Lender’s Experience. Lenders are in the business of evaluating risk and can provide 

valuable insight. The underwriting tools they have access to, such as automated underwriting 

models, provide a useful perspective on borrower risk. PJs should plan to leverage this expertise in 

the design of their programs. 

• Consider a “Top-Down” Approach. Secondary market investors call the shots on much of a 

primary lender’s origination activity. PJs may want to start with a local or regional office of a 

secondary market enterprise and then approach primary lenders with proposed terms that have 

already earned at least preliminary approval. 

• Agree On Underwriting Criteria. A homebuyer program will operate much more efficiently if 

partners establish mutually acceptable underwriting criteria. If everyone knows what is “bankable,” 

then time will not be wasted packaging and referring borrowers who are unlikely to receive loan 

approval. Factors to specify clearly include debt-to-income ratios, loan-to-value ratios, and credit 

benchmarks. 

• Make Sure Rates and Fees the Lender Proposes Are Competitive. Lenders generate profits by

charging origination fees, along with a combination of discount points and interest rates. In addition, 

many loan transaction costs are pass-through fees (such as appraisals, title reports, and credit 

checks). Subsidy dollars will be lower and the first mortgage more affordable if the lender can be 

convinced to waive or reduce fees and provide competitive interest rate loans. At a minimum, 

lenders should be able to offer a fee structure comparable to what is available to its borrowers who 

do not receive HOME assistance. 

• How Does CRA Fit? PJs need to do some homework to understand whether CRA compliance is a 

key element of a prospective lender partner’s business plan. This can vary depending on the 

institution’s charter, where it is in the exam cycle, and on the institution’s plans for mergers or 

branch closings. The National Community Reinvestment Coalition is a basic source of CRA 

information for advocates. Its website is www.ncrc.org. 

Delivering and Funding Homebuyer Counseling 

As discussed in Chapter 1, recent research demonstrates that individual and classroom homebuyer 

education and counseling (simply “counseling” hereafter) reduce the likelihood of mortgage default. The 

new research provides even stronger support for incorporating counseling into affordable housing 

programs. Taking account of what is known to work, the challenge for PJs is to design counseling services 

that meet their communities’ needs and to work with partners to provide additional support and funding. 

Designing Counseling Services 

In developing counseling programs, there is an array of formats to consider, including pre-purchase, postpurchase, and comprehensive counseling services. The selected format should reflect both client needs and 

partnership resources available. For example, with a strong partnership of lenders, counseling providers, 

and a secondary market, PJs can develop a comprehensive (or “full service”) lending program. 

Comprehensive lending provides buyers with counseling throughout the entire home buying process, and 

supports them as new homeowners. Neighborhood Reinvestment Corporation (NRC) is the most prominent 

advocate of this approach, which it labels Full-Cycle Lending. 

55
The NRC Full-Cycle Lending Program is a 

comprehensive counseling program that includes the 

following elements:

• Pre-purchase education; 

• Affordable financing with flexible loan products; 

• Property services, such as home inspections; 

• Post-purchase counseling; and 

• Post-purchase assistance, for those struggling with 

mortgage payments. 

More information on the NRC Full-Cycle Lending Program 

can be found at http://www.nw.org/network/ 

nw/network/strategies/oldcampaign599/fullcycl.html. 

One-on-one counseling sessions have been 

found to have the greatest impact on 

reducing mortgage delinquency rates. 

However, these sessions can be the most 

costly to provide. To reach a larger number 

of potential homebuyers, classroom 

counseling is a popular option. A variety of 

materials have been produced to support 

classroom delivery, which typically 

involves from 4 to 10 hours of instruction. 

Telephone counseling has been shown not 

to have any statistically significant effect 

on repayment behavior. 

Because clients served by a HOME-assisted 

financing program will each have different 

needs, PJs can adopt a combination format 

that provides counseling of different 

intensity depending on a participant’s level 

of knowledge and experience. In this way, 

costly one-on-one services can be made 

available to borrowers who need more help 

preparing for homeownership, and less 

intensive group counseling sessions can 

assist people who are more prepared to buy a 

home. Quality screening and assessment are 

key components of such an approach. 

Lenders support counseling because of their 

stake in loan performance. PJs can build 

upon this basically favorable stance. They 

can point out specific benefits counseling 

can bring to the lender’s business. For 

example, if the PJ’s homebuyer program is 

focusing on stabilizing homeownership in a 

specific neighborhood, a local lender can be 

encouraged to provide or sponsor counseling 

as a way to get to know the market and 

possibly provide other financial services. 

In presenting the benefits of counseling to a 

lender, or any potential partner, PJs should 

remember what they themselves bring to the 

partnership. PJs often have a unique 

understanding of the communities they serve. They also have connections with community leaders that are 

important to lending institutions. 

Exhibit 5-1 

Designing Counseling to Meet Community Needs 

The ideal type of counseling program for a PJ is tailored to 

address the assessed needs of the clients being served: 

• How much do clients know about home buying, 

budgeting, and finance? 

• How much help will participants require to repair 

credit? 

Program design also depends on the partners involved: 

• Does the PJ work with organizations that already 

have counseling curriculums or programs in place? 

• Will these programs suit the PJ’s clients? 

• Will lenders work with the PJ to design or fund a 

program that fits the community’s needs? 

Counseling costs money, especially when delivered 

individually or in classroom settings. PJs need to consider 

efficiency in designing counseling programs. “One size fits 

all” is likely to be inappropriate unless the program is 

narrowly targeted. 

• Can the counseling program be targeted to provide 

more intensive services to borrowers with the highest 

risk? 

• Can the counseling requirement be waived for 

experienced homeowners, those with high credit 

scores, or rehabilitation loan applicants? 

As discussed in Chapter 2, HOME funds can be used to pay for homebuyer counseling as an administrative 

cost, or as a project soft cost when the homebuyer also receives direct HOME assistance. 

56
Know the Providers 

Lenders are only one of a group of counseling providers, all of whom act in different ways. Anticipating 

what various players typically bring to counseling programs helps PJs reach out to organizations who can 

best assist the target communities. 

• Government. Counseling programs have 

historically received financial support from the 

government, primarily through HUD, which 

provides grants to HUD-approved housing 

counseling agencies. These grants are 

competitive, and the funds are not meant to 

cover all counseling program costs. HUDapproved agencies must offer counseling 

services in a one-on-one format. 

• Nonprofi t organizations. Nonprofit 

organizations have been the traditional providers of counseling services. Although other providers, 

including lenders, have increased their activities, nonprofit organizations continue to deliver a major 

share of buyer counseling. They often partner with other organizations for funding. Local nonprofit 

groups have strong community links that enable them to reach out to people in need of counseling. 

In 2002, 12 national and regional 

intermediaries and 322 state and local 

housing counseling agencies received over 

$18 million in HUD funding. A list of HUDsponsored housing counseling agencies is 

available online at: 

http://www.hud.gov/offices/hsg/ sfh/hcc/ 

hccprof14.cfm. 

 Many local nonprofit counseling providers operate under the umbrella of larger, national 

intermediary organizations. These intermediaries’ scale gives them greater access to the funding and 

resources needed to develop curriculum and delivery systems. Some of the major organizations 

involved in counseling include ACORN, Neighborhood Reinvestment Corporation, and National 

Foundation for Consumer Credit (Consumer Credit Counseling). 

• Lenders. As the party with the most to gain from successful counseling (after the borrower of 

course), lenders should logically be financial backers. To date, their financial support has been 

limited. PJs should not hesitate to seek funding support, and the recent research on counseling’s 

impact on loan performance makes a compelling case. 

• Mortgage Insurance Companies. Like lenders, mortgage insurers often partner with nonprofit 

organizations to deliver counseling services. They are also providing counseling over the Internet 

and on the phone. One company is partnering with the National Foundation for Consumer Credit on 

both pre-purchase and post-purchase counseling. 

• Secondary Market Enterprises. Secondary market agencies have been leaders in supporting buyer 

education and counseling. Recently, one agency developed a model curriculum to reach borrowers 

with low literacy levels. They are partnering with nonprofit organizations to prepare them to train 

the new curriculum and provide grants to support the training. 

Developing Lender Partners to Support Unusual 

Homebuyer Programs 

PJs often need to push the envelope with creative finance programs. Even stalwart mortgage finance 

partners may balk at collaborating on loans that are new to them. Following are basic descriptions of a few 

programs that are not uncommon to PJs, but are less familiar to most traditional mortgage lenders. The 

mortgage lender’s perspective and possible roles for HOME assistance are included. 

57
Land Trusts 

In a land trust, residents own the individual dwelling units, but the trust holds title to the land, which is 

leased to the homeowners. The land lease provides firm control over home resale prices, which are limited 

to ensure permanent affordability. Controls also limit approval to buyers based on income or other factors. 

The permanent affordability provided by land trusts means that HOME subsidy dollars have permanent 

impact. 

Community land trusts are local nonprofit organizations that can operate as community housing 

development organizations (CHDOs) under the HOME Program. Land trusts that qualify as CHDOs are 

eligible for HOME set-aside funding and can get operating support through the PJ’s allocation. Although 

HOME funds can assist land trusts in a variety of ways, including capacity development, technical 

assistance, and feasibility studies, HOME Program funds may not be used to acquire land for future 

development (also known as land banking). 

HOME Program funding for land trusts is often leveraged with private financing, such as mortgages, and 

other government funding sources, including tax credits or state housing finance agency funds. In the 

public sector, Community Development Block Grant (CDBG) funds are one of the primary sources of land 

trust financing. Federal Home Loan Bank resources also help land trusts, as their mission of permanent 

affordability gives them a scoring advantage when competing for funding. In the private sector, financing 

may be more difficult. 

A mortgage on a land trust home in the private market is non-standard, since the homeowner does not own 

the land. Mortgages with ground lease and resale restrictions are generally perceived as riskier in the 

private mortgage market. Mortgage institutions have concerns about limitations on their ability to realize 

collateral value in the event of foreclosure. The resale controls for most land trust housing gives 

mortgagors a limited market to sell the property. 

Advocates of community land trusts argue that land trust homes actually carry less risk than conventional 

mortgages. Since the trust shares an interest in the successful repayment of the mortgage and has regular 

contact with the homeowner, it can notify lenders of payment difficulties and work with the homeowner to 

resolve them. Such provisions can be written into the ground lease. In the event of default, the trust has the 

option to purchase the home and continue payments to the lender. In effect, the lender has a backup 

borrower. 

Secondary market agencies have facilitated the process of lending for community land trust dwellings. 

They have special programs that address key issues and allow primary lenders to sell land trust mortgages. 

Housing Cooperatives 

Housing cooperatives are resident-controlled nonprofit corporations that own housing units, typically in a 

single building or complex. The creation of cooperative housing is initially financed with a blanket 

mortgage through the commercial real estate division of a financial institution. The blanket mortgage is the 

obligation of the nonprofit cooperative corporation. The shares that residents hold in the nonprofit 

corporation entitle them to occupy a particular unit. 

Resident shareowners may sell their shares at market value. Residents of limited equity cooperatives may 

sell only at specified, limited values designed to keep the project affordable over time. Share loans, not 

mortgages, finance the acquisition of cooperative shares/living units. Lenders active in the cooperative 

market provide share loans. Secondary market agencies have programs both for blanket loans and share 

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loans. Cooperatives are eligible for HOME assistance. Depending on state or local law, a cooperative unit 

may be either homeownership or rental housing. 

Condominiums 

When buying a condominium unit, the purchaser acquires sole title to a dwelling unit and a proportionate 

interest in common areas and facilities such as greenspace or community buildings. Condominium projects 

present lenders and secondary market agencies with special risks due to the concentration of units and the 

importance of good management. Mortgage lenders will have a number of questions about proposed 

HOME-assisted condominium purchases, such as: 

• Ratio of owner-occupied to renter-occupied units; 

• How long owners have been in control of the condominium association; 

• State of completion of units and common areas; 

• Insurance coverage held by the association; 

• The project’s marketing track record; and 

• Proportion of units already financed by the lender in the project. 

Two- to Four-Unit Owner-Occupied Homes 

Two- to four-unit properties account for almost nine percent of the nation’s housing stock. Becoming a 

landlord by purchasing a two- to four-unit building and occupying one unit can be an effective way for 

buyers to earn extra income and surmount high housing costs. 

Buying a two- to four-unit property is an ambitious step for buyers who might not have managed rental 

property before. Making this program idea work takes careful planning and partnership among the PJ, the 

lender, and buyer education providers. Note that rental income is added to the borrower’s other income to 

determine HOME income eligibility. Chapter 2 describes additional technical HOME requirements for PJs 

that invest HOME funds in two- to four-unit properties. 

Secondary market agencies have taken the initiative to design mortgage programs that make it easier for 

low- and moderate-income households to finance two- to four-unit properties. One such program allows 

originating lenders to add all rental income to the borrower’s qualifying income. Combined with low 

downpayments and higher expense-to-income ratios, this expands buyers’ purchasing power. 

HOME funds and specialized education on managing a small rental property could complete the picture. 

Because of the specialized nature of loan underwriting and secondary market rules for a two- to four-unit 

property, PJs will need to be clear on program goals and shop carefully for lender partners willing to invest 

the effort. Follow-up support for buyers after purchase could be important too. 

Manufactured Housing 

Manufactured housing is the term reserved by Congress for homes built to the building code implemented 

in the Manufactured Home Construction and Safety Standards Act, which took effect in June 1976. (Note: 

“modular” housing is built to local building codes.) 

Manufactured housing deserves close attention. It makes up approximately 18 percent of all affordable 

housing stock in the nation. Owners of manufactured homes comprise about five percentage points of the 

nation’s homeownership rate. Many buyers and residents of manufactured housing meet HOME income 

guidelines. 

59
Many of the manufactured housing finance practices are a holdover from the days when the manufactured 

housing units were considered vehicles or trailers. Manufactured home retailers provide one-stop shopping, 

including financing. Mortgage lenders and secondary market agencies have begun to participate in the 

market, but many buyers still pay interest rates three to five percentage points higher than site-built 

homebuyers. For older units, purchase financing is even more costly, or simply unavailable. Equity and 

rehabilitation loans are hard to find. Financing costs and associated marketing practices contribute to the 

widespread problem of manufactured home value depreciation. 

The existing manufactured housing stock has something of a split personality. Units over 20 years old, 

many of them single-section units, are frequently of lower quality. Many are located on leased land, 

making financing more problematic. In contrast, a majority of new manufactured homes are double-section 

units placed on the owner’s private land. Well-constructed newer units can be functionally equal to sitebuilt homes. Quality still varies widely, and improper installation is a frequent source of problems. 

Compliance with the Manufactured Home Construction and Safety Standards, also known as the HUD 

code (24 CFR Part 3280), is evidenced by a metal tag affixed to the end of the home opposite the hitch. 

HOME funds can fill some of the gaps in existing private-sector finance, while also introducing 

mainstream mortgage lenders to a large market sector in need of their products and services. Possible 

HOME-assisted initiatives: 

• Partner with mortgage lenders on purchase financing for new and existing units. For the purchase of 

owner-occupied units on leased land, the lease period must be equal to or greater than the HOME 

affordability period. 

• Provide replacement home financing assistance; 

• Provide land purchase financing assistance; 

• Provide buyer education for manufactured home consumers; 

• Provide rehabilitation financing (Note: HOME regulations do not require a long-term lease when 

rehabilitating existing owner-occupied manufactured homes); or 

• Partner with a CHDO to create model manufactured home subdivision designed for value 

appreciation. 

Lease-Purchase 

In lease-purchase programs, tenants lease a home for a period of time before purchasing it, and a portion of 

their rent payments during the lease period are credited to the home purchase down payment. Leasepurchase programs can be particularly effective for participants with poor or insufficient credit histories. 

During the lease period the potential homebuyer can build a payment history that supports mortgage 

qualification. 

Circumstances can change greatly during the lease phase of a lease-purchase program. For example, 

interest rates can increase and put the purchase out of reach. The borrower’s employment, family size, and 

marital status can also change during the period. HOME regulations stipulate that if, at the end of the 36-

month period the household occupying the lease-purchase unit is ineligible or unable to purchase the unit, 

the PJ gets an additional six months to identify another homebuyer. In all cases, if a homebuyer does not 

purchase the unit by the end of the 42-month period, the unit must become a HOME rental unit. What this 

means in practical terms is that the PJ must either have a pool of eligible homebuyers available to step in 

and purchase units, or the PJ must reserve funds to subsidize the existing tenant. 

Self-Help Housing 

60
The basic concept of self-help housing programs is the use of “sweat equity,” (homebuilding labor 

provided by the beneficiary), to help reduce the cost of the home. Probably the best-known practitioner of 

this concept is Habitat for Humanity, which uses homebuyer and volunteer labor to achieve dramatic cost 

reductions. 

Two Federal resources are available specifically to promote self-help housing programs. 

• U.S. Department of Agriculture Rural Housing Service’s (RHS) Section 523 Mutual-Self Help 

Housing Program. This program funds nonprofit organizations that provide technical assistance to 

low- and very low-income households to build their own homes in a rural area. Funds may be used 

to pay salaries, rent, and office expenses of the nonprofit organization. Homes built by Mutual SelfHelp grantees typically receive low interest long-term financing through RHS’s Section 502 Loan 

Program. 

• HUD’s SHOP Program. This program funds nonprofit organizations to purchase home sites and 

develop or improve the infrastructure needed to set the stage for sweat equity and volunteer-based 

homeownership programs for low-income families. 

Mutual Housing 

Mutual housing has characteristics of both ownership and rental housing. Mutual housing is developed, 

owned, and managed by a nonprofit corporation known as a mutual housing association, whose board of 

directors is majority-controlled by residents and potential residents of the mutual housing facility. Other 

board members may include local government representatives, business leaders, and members of the larger 

community. The association’s mission is to provide permanently affordable, resident-controlled housing. 

Mutual housing gives residents much more security of tenure than traditional rental housing. It also gives 

residents authority over how their housing is managed. 

Mutual housing residents do not own their units, rather they own the corporation that owns the units. 

Residents have lifetime occupancy rights and they can pass those rights on to another family member. In 

addition to their monthly housing charge, residents typically pay a one-time membership fee, which is 

refundable when they leave their unit. In most states, resident membership in the association, combined 

with the rights granted by the occupancy agreement, constitutes a personal property ownership interest. 

The Neighborhood Reinvestment Corporation provides information and assistance for those interested in 

mutual housing. See http://www.nw.org/NWIS/Home 

FrameX.asp?searchfor=17&keywords=mutual~housing. 

61
Conclusion 

HOME funds can be the missing link for low- and moderate-income buyers searching for a way into 

homeownership. The flexibility of HOME allows PJs to structure programs that meet many different 

buyers’ needs, but PJs cannot simply finance affordable homeownership by themselves. PJs must work 

within the larger context of a rapidly evolving mortgage finance marketplace. To design and implement 

successful programs, PJs need to know how the mortgage industry works, and what motivates its major 

participants. 

Understanding some of the fine points of the mortgage market equips PJs to approach lenders as peers and 

working partners—and partnership is indeed the right word for a relationship where both sides have 

something to gain. A well-designed homebuyer program offers real benefits to both private and public 

sector lenders. The affordable mortgage market is a major way to expand mortgage business, and HOME 

funds offer a prudent path for moving beyond conventional underwriting boundaries. Access to buyer 

counseling and ongoing support for buyers after purchase are valuable assets PJs can bring to the table. 

This guide has suggested how PJs can operate successfully as players in the world of mortgage financing. 

It has presented the monitoring and compliance requirements PJs must attend to directly, to avoid the 

pitfall of delegating too much. Using current information about industry practices for loan origination, 

credit evaluation, risk management, and loan servicing, astute PJs can negotiate terms to benefit low- and 

moderate-income borrowers. 

62
Index 

203(b)—See Federal Housing Administration 

203(k)—See Federal Housing Administration 

Appraisals, 17, 19, 23, 36, 37, 39, 48, 52 

Automated underwriting—See also Underwriting, 36-37, 50, 51 

Back-end ratio, 36 

Banks, 3, 5-8, 10, 17, 39 

Buyer education—See also Counseling, Post-purchase counseling, Pre-purchase counseling, 2, 9, 11-13, 

20, 23, 39, 42, 48, 50, 51, 52-56 

CDFI—See Community development finance institutions 

Closing—See Loan closing 

Collateral, 2, 3, 11, 13, 35-36, 38, 39, 52, 55 

Commercial banks, 5 

Community development finance institutions, 6, 49 

Community Reinvestment Act, 1, 6, 15, 51 

Condominiums, 1, 21, 22, 29, 53, 55 

Cooperatives, 21, 22, 29, 30, 55 

Cost allocation, 17, 18-20 

Counseling, 1, 2, 11-13, 15, 19, 20, 39-42, 45, 47-49, 52-54, 57 

Credit enhancement, 4, 5, 38 

Credit scores, 9, 35-38, 40, 53 

Credit unions, 6, 7, 49 

Deed restrictions, 21, 27, 28, 30, 40, 43, 49 

Deferred payment loans, 18, 38, 39, 43, 44 

Development finance institutions—See Community development finance institutions 

Education—See Buyer education 

Fannie Mae, 3, 4, 8, 9, 15 

Federal Home Loan Mortgage Corporation—See Freddie Mac 

Federal Housing Administration, 4, 5, 7-8, 10, 21, 22, 29, 36, 50 

Federal National Mortgage Association—See Fannie Mae 

FHA—See Federal Housing Administration 

FICO, 37, 40 

Finance companies, 6 

Foreclosure, 2-3, 10, 12, 14, 27, 39, 41-45, 48, 54 

Freddie Mac, 3, 4, 8, 9, 15 

Front-end ratio, 36 

Gap financing, 21, 39, 48 

Ginnie Mae, 3, 4, 8 

Good Faith Estimate of Settlement Costs—See HUD 1 

Government National Mortgage Association—See Ginnie Mae 

Government-sponsored enterprises, 9 

GSE—See government sponsored enterprises 

63
HMDA—See Home Mortgage Disclosure Act 

Home Mortgage Disclosure Act, 6, 7, 51 

Housing cooperatives—See Cooperatives 

Housing counseling—See Buyer education 

HUD 1, 19, 37-39, 48 

Land trusts, 2, 22, 54, 55 

Lease-purchase, 18, 22, 23, 56-57 

Lien priority, 39 

Loan closing, 7, 8, 13, 17-19, 24, 26, 37-40, 48 

Loan guarantee, 7, 8, 18, 33, 39, 50, 51 

Loan origination—See Origination 

Loan seasoning, 5 

Loan servicing—See Servicing 

Loan-to-value ratio, 3, 5, 36, 39, 41, 51, 52 

Long-term affordability—See Period of affordability 

Manufactured housing, 2, 17, 22, 23, 29, 50, 56 

Monitoring, 1, 2, 28, 29, 43, 51, 58 

Mortgage bankers, 3-5, 15 

Mortgage brokers, 5, 15 

Mortgage credit certificates, 8 

Mortgage insurance, 4, 7, 13, 14, 38, 39, 50, 54 

Mortgage revenue bonds, 8 

Mortgage-backed securities, 4 

Mutual savings banks, 6 

Nonprofit organizations, 6, 11, 12, 18, 32, 47, 48, 50, 51, 54, 55, 57 

Origination—See also Origination fees, 4, 5, 13-14, 35-37, 41, 44, 49-52, 58 

Origination fees, 2, 4, 11, 19, 37, 50, 52 

Other Federal requirements, 28, 31-32 

Per unit subsidies, 19, 21, 49 

Period of affordability, 2, 17, 18, 22, 24-27, 28, 30, 42-45 

PITI (principal, interest, taxes, insurance), 25, 39 

PMI—See Private mortgage insurance 

Points, 37, 49, 52, 56 

Portfolio lending, 5, 37 

Post-purchase counseling, 12, 40, 42, 45, 48, 51, 53, 54 

Predatory lending, 2, 10, 11, 15, 42 

Pre-purchase counseling, 12, 13 

Presumption of affordability—See Period of affordability 

Private mortgage insurance, 4, 38 

Property inspections, 23 

Property standards, 21-23, 28, 30, 36, 49 

Recapture, 24-25, 26, 27, 28, 30, 38, 40, 43, 45, 49 

Record-keeping, 27, 28, 32, 49 

Resale restrictions, 27, 44, 55 

RHS—See Rural Housing Service 

64
Rural Housing Service, 4, 7-8, 50, 57 

Seasoning—See Loan seasoning 

Secondary mortgage market, 3, 4, 7-8, 48, 50 

Section 502 Direct Housing Loan Program, 8 

Section 502 Single Family Housing Loan Guarantee, 7 

Self-help housing, 57 

Servicing, 2-4, 6, 14, 27, 41-46, 48-50, 58 

SHOP, 57 

Subprime lending, 9-11 

Sweat equity, 31, 57 

Thrift institutions, 3, 5, 6, 7 

Transaction fee, 37, 49 

Underwriting—See also Automated underwriting, 2, 9, 35-40, 48-50, 52, 56, 57 

U.S. Veterans Administration, 5, 8 

VA—See U.S. Veterans Administration 

Written agreements, 21, 24, 25, 27, 29, 30, 43, 49 

Yield spread premiums, 5 

 

65