(Note: This section covers existing funding mechanisms. For discussions of policy and ways to improve/increase the funding of affordable housing, see the Policy section.)
Types of Funders
Federal Government. The federal government funds housing primarily through the Department of Housing and Urban Development (HUD). Rural housing programs are administered by the US Department of Agriculture (USDA). HUD provides grants to developers of nonprofit housing, rental assistance to low-income tenants, and mortgage insurance. There are a number of HUD programs focused on funding housing for special populations, such as the elderly, homeless, or first-time homebuyers.
Several federal funding sources are actually distributed or implemented by state or local government, including Community Development Block Grants, HOME funds, and low income housing tax credits.
Several federal funding sources are actually distributed or implemented by state or local government.
State Governments. State governments are usually very active in funding affordable housing, through both state housing finance agencies and community development departments. They distribute federal funds and Low Income Housing Tax Credits, and also raise their own funds through bond sales or by dedicating taxes to a housing fund. State programs differ, but they usually involve below-market loans and grants. Some states have their own housing tax credits as well.
Local Government. Local governments' participation in housing funding will vary greatly by their size. Counties and municipalities serve as conduits for state and federal money. They can also set up their own housing funds, funded by taxes or linkage fees, which can be used for below-market loans and grants. Larger cities can also do bond sales. Local governments also can choose to offer property tax exemption or incentives to developers of affordable housing.
Financial Institutions. Thanks to the Community Reinvestment Act of 1977, commercial banks are required to "meet the credit needs" of all the areas from which they draw deposits. They usually do this through below-market loans to both developers and qualified low-income homebuyers, and grants to community development nonprofits. Many banks have set up a separate community development division, and partner with local organizations that provide services like homeownership counseling to their borrowers. Larger banks often have a separate foundation to handle the grants.
The community Reinvestment Act is responsible for over $1 trillion of investment in low-income and people of color communities.
National Community Reinvestment Coalition
Community Development Financial Institutions (CDFIs) are financial institutions that focus on community development. CDFI is a US Treasury designation. CDFIs can range from local credit unions to national funds, and affordable housing is one of their primary lending areas. They are often nonprofits.
Intermediaries. Some nonprofit organizations, especially the Local Initiatives Support Corporation and The Enterprise Foundation, specialize in passing through grants, loans, and tax credits from larger funders to local nonprofit developers. Tax credits especially have been called "a full-employment program for lawyers." Very few developers use tax credits without going through a "syndicator," and these intermediaries often play that role for nonprofit developers.
Foundations. Foundations usually make grants. Affordable housing is not a top priority for many foundations. When it is, they are more likely to support organizational development or program development than a specific building project. Large funders that support community development often do it through intermediaries. Some foundations do make project-specific loans, in the form of program related investments.
Types of Assistance
Subsidized Loans. One way to make housing more affordable is below-market loans for rehab or development. For rental housing, these would be loans to the developer. For homeownership housing, a below-market construction loan to the developer can make the purchase price lower and a below-market mortgage for the buyer can further lower the payments. Lower downpayment requirements can also help low-income homebuyers. States, localities, and commercial banks are the most common sources of subsidized loans to affordable housing developers. Commercial banks and CDFIs are the most common sources for loans to low-income homebuyers.
Rental Assistance/Operating Subsidy. Rental assistance is an on-going payment to the owner of a rental property for the difference between the market rent and an agreed upon amount that a low-income tenant can afford to pay. Rental assistance is primarily provided by the federal government, and some by state and local.
Section 8 is perhaps the largest operating subsidy provided by the federal government. It provides direct grants covering the difference between 30 percent of an eligible tenant's income and the Fair Market Rent calculated by HUD. Project-based Section 8 is associated with a particular unit, while tenant-based Section 8 takes the form of vouchers that tenants can use to rent a range of apartments. Section 8 contracts can last from one to 30 years, and they are administered by local Public Housing Authorities.
The federal government also has rental assistance programs for specific populations, such as the elderly (Section 202) and homeless people with disabilities and their families (Shelter Plus Care).
Mortgage Insurance. Mortgage insurance protects lenders against losses from on mortgage defaults. This makes housing more affordable because lenders can offer lower interest rates when their risk is lower. The federal government provides affordable mortgage insurance through the Federal Housing Administration. Federal mortgage insurance is available for homes within a limited purchase range, and the required down payment is smaller than that required for commercial mortgage insurance.
Development Grants/Forgivable Loans. Grants do not need to be repaid. Forgivable loans turn into a grant once a certain result has been reached. Grants rarely cover the entire cost of an affordable housing development, but there are many available for specific purposes. The federal government, foundations, and the charitable arms of commercial banks give grants.
Debt vs. Equity
In real estate, people refer often to debt and equity. Simply put, debt refers to loans that have to be repaid with interest. Equity refers to investment by an entity that then owns part of the housing. Equity investors receive their "repayment" either through tax benefits or proceeds from revenue on the increase in price of the property at re-sale.
Equity . Equity is form of investment in which the investor gets a partial ownership stake in the project and makes money from profit-sharing or at resale rather than by collecting interest. The most common form of equity investments in low-income housing are tax credits, whereby investors save money on their taxes for investing in affordable housing.
The federal government offers the Low Income Housing Tax Credit, which has become the largest affordable housing production program in the country. LIHTCs are authorized through the federal tax code, and administered by state agencies. (Some states have their own tax credits as well.) Each state is allocated to distribute a certain amount of LIHTCs per capita. The distribution process is usually very competitive. Some states give nonprofit developers extra points in the competitive process.
Housing built with tax credits must be rental units. There are two affordability options: either 40 percent of the units must be affordable to families making at or below 60% of AMI, or 20 percent must be affordable to families making at or below 50% of AMI. These restrictions last for 10 to 15 years.
Tax Exemptions. Some local or state governments (depending which has the authority to assess property taxes) offer tax exemptions for affordable housing. Sometimes this is a matter of a specific exemption program. For example, in New York City, the J-51 program grants exemptions for 15 years for buildings whose owners meet various criteria and make it through a strenuous application process. In other situations, an exemption may be negotiated for a particular development.
Developer Incentives. Local governments, which usually have jurisdiction over zoning and land use regulations, can use that jurisdiction to create developer incentives, such as a "density bonus" for inclusion of affordable units in a development. Some areas make programs like this mandatory (e.g. inclusionary zoning), with the "incentive" as compensation. Others make voluntary programs, with the incentive actually serving as encouragement.