Think Getting a Mortgage is Hard? Try Financing Affordable Housing - Redfin Real Estate News

Think Getting a Mortgage is Hard? Try Financing Affordable Housing

Updated on October 6th, 2020

Financing affordable housing isn’t easy.
Without subsidies, it’s almost impossible for developers to build homes that are affordable to low- or extremely low-income families. That’s because lenders loan money for housing development based on the property’s expected income. When rents are set to affordable levels, there’s a huge gap between what’s needed to build and the money lenders and investors provide.
A new interactive tool from the Urban Institute and the National Housing Conference illustrates how complex affordable housing can be.
New, affordable apartment buildings—albeit not enough of them—are built. So how do those developers do it? The short answer is creative financing and a lot of work.
The primary source of funding is the Low-Income Housing Tax Credit, a federal tax credit administered by state agencies. Most affordable housing that gets built receives tax credits. A simulation from the National Housing Conference and the Urban Institute shows tax credits are the default for buildings with 100 or more units.
To be eligible for tax credits, a development must dedicate at least either a fifth of its units to people earning less than half of the area median income or 40 percent of apartments to those earning less than 60 percent of area median income. To be considered affordable, rent for those apartments can’t exceed 30 percent of the designated income level.
Developers compete to win the limited supply of credits, and that competition can be fierce.

That’s just the beginning

Even if a developer can get a tax credit allocation, it’s rarely enough.
Most affordable housing financing deals involve a mortgage loan, tax credits and two or three other sources of money. It’s not uncommon for developers to rely on 20 financing sources.
Some of that money comes from federal block grants. Some comes from foundations, local trust funds, or state housing trust funds. Some states or localities will give developers a break on property taxes. There are tax credits for clean energy and historic building preservation. In rural areas, the U.S. Department of Agriculture sometimes subsidizes affordable housing.
Then there’s rental assistance. The promise of federal aid to tenants is key to drawing lenders and investors to a project. It assures them the new building will have renters and that those renters will pay, because they’re getting help from the government.
Rental assistance allows developers to serve lower income households while ensuring that there’s enough rental revenue to operate the property and pay down the debt.
Still, only about one in four people who qualify for housing assistance actually receives it.

It gets messier

The problem with this multitude of funding sources—besides the fact that funds are limited—is the lack of standardization. Most tax credits and subsidies are awarded through a bidding process, each with its own timelines and applications.
Developers who need to supplement their federal tax credits with three or four other funding sources will sometimes win one grant but then wait six months for another. That delay can be fatal to the project. Some states, such as Massachusetts and Minnesota, coordinate their grant and tax credit programs to mitigate this problem.
Funders also change their minds. Illinois recently prioritized housing in areas of opportunity in awarding grants to affordable housing developers. This year, however, they’ve added priorities for projects that help with community revitalization.
Spending public dollars where they’re most needed is good public policy. But shifting priorities can pose a challenge to developers looking to build affordable housing because acquiring land, planning and applying for funds is a multiyear process.
States should consider ways to better coordinate the variety of grants and tax relief opportunities available to affordable housing. And it’s important for all levels of government to ensure there’s enough funding to meet the need.
— With Alexandra Tilsley, Urban Institute


Pam Blumenthal and Ethan Handelman

Pam Blumenthal is a senior research associate in the Urban Institute’s Policy Advisory Group, where she provides policymakers with evidence-based recommendations. She also is part of the Metropolitan Housing and Communities Policy Center. Ethan Handelman is vice president for policy and advocacy at the National Housing Conference. He serves on the board of Housing Unlimited, a nonprofit in Montgomery County, Maryland.

Email Pam Blumenthal

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