TOOL 1: Homebuyer Purchase Incentives
The purpose of a homebuyer incentive in the context of building neighborhood markets is to give a neighborhood that is less than “first-choice” a competitive advantage so that it can more successfully attract owner-occupant buyers.
The incentive most often takes the form of a grant or loan for down payment assistance, but also has occasionally been a grant or loan for home improvement upon purchase, or access to free college tuition for academically qualified residents.
There are two important decisions to make about the design of a down payment assistance incentive:
- Who will the down payment assistance be available to?
- To what extent will it be repayable, over what period of time?
1. Who will the down payment assistance be available to?
This decision is an important one, and should be made according to the goal of the incentive. If the goal includes building demand in the neighborhood, strengthening housing values, strengthening income mix and the like, the incentive should be available to as broad an income range as possible (the limiting factor may be funding source.)
The theory behind this approach is that even though a homebuyer earning 125 percent of median income has less financial need of the subsidy in order to afford the home purchase, the neighborhood needs that buyer to occupy a home, invest in that home’s upkeep and improvement, participate in the social life of the neighborhood, etc. Unless there is a financial incentive to sweeten the deal for such a homebuyer, they will very likely choose a neighborhood they perceive to be better, even if it costs more.
If the goal of the incentive is to subsidize lower-income buyers and protect affordability in the neighborhood, then it makes sense to restrict the incentive to buyers of more modest means. Typically, incentives of this type target buyers earning less than 80 percent area median income, or even less than 50 percent.
Although it is common practice, there is a danger in trying to accomplish both goals in a neighborhood that has a weak market with an excess of housing supply. If the only households who buy a home in a neighborhood are those with very low incomes, with no other choices, the neighborhood’s “brand” will be a place of last resort and it will struggle to become a place that can attract buyers with choices. Because concentration of poverty has overwhelming negative implications for people and places, this is something to be avoided.
2. To what extent will it be repayable, over what period of time?
Usually, homebuyer incentives take the form of down payment assistance, which can be an outright grant, a non-amortizing (“soft” or “silent”) second mortgage that is due on sale or a hybrid, in which at some point of tenure (typically five years), all or a portion of the loan is forgiven. For example, a homebuyer may be given a $20,000 incentive, all of which is due on sale or transfer of the property within the first five years of purchase; thereafter, one-fifth of the incentive is forgiven for each additional year the buyer continues to occupy the property.
It is always better from a funder’s point of view to recapture as much of the incentive as possible so that it can be used to incentivize additional buyers in the future. Further, it is reasonable to design the incentive to encourage the longest tenure possible, as stability of owner-occupants is generally good for neighborhoods. On the other hand, the incentive cannot be so restrictive that it fails to seem like a good deal to the prospective homebuyer. For example, an incentive that is forgiven over the course of twenty years instead of five is less attractive to a homebuyer. If the market is very strong, a lengthy forgiveness period may still be attractive, but if the buyer has many other choices, it may not be. This aspect of the incentive should be decided on the basis of market knowledge gained through talking to real estate professionals and buyers themselves.
Local governments or community development nonprofits typically administer downpayment or rehab incentives. In some cases, a lender may offer an incentive in tandem with its own first mortgage, but it is rarely tied to a particular geography. Sometimes a foundation or business will build the capacity to deliver an incentive they’ve funded.
The size of the down payment incentive should be determined by what will motivate buyers to choose the target neighborhood over other choices they may have. In practice, the size is also shaped by affordability gaps between a target income group and the typical home price, by the availability of funds, by whether it is a loan or grant and other, local considerations. In a low-cost market, down payment assistance may be as low as $5,000; in a very high-cost market, it may be $80,000.
3. Funding sources for downpayment or purchase-rehab assistance could include:
- Federal block grants to states and municipalities: Community Development Block Grant (CDBG), or HOME. Both of these programs generally limit the income of recipients to 80 percent or less of area median income.
- Neighborhood Stabilization Program (NSP) funds, which are federal grants to states, municipalities or consortia of nonprofits and other partners. This program limits the income of recipients to 120 percent or less of area median income.
- Private funds raised from foundations, major employers located in a particular neighborhood or other private donors. These funds are income-limited only by the donor.
- Proceeds of municipal bonds issued by a local government unit or housing finance agency. The limitations of these may be defined in any way.
- Private funds through a program administered by a financial institution, attached to a first mortgage loan product they make.
- A special tax-funded pool, such as the Florida Housing Trust in the State of Florida, funded by a real estate transfer stamp tax. The income limits of such a fund would be decided by the authorizing legislation.
Go to information on the Florida Housing »
Specific universities have offered free college tuition programs for residents of a particular neighborhood. An example is Clark University in Worcester, Massachusetts. Clark offers free tuition to residents who meet the University’s admissions requirements and who have lived in UPP’s targeted Main South neighborhood for at least five years. Clark also incentivizes home purchases and renovations by its faculty and staff in the neighborhood.
Go to information on the Clark University Program »
Kalamazoo Promise, which is funded by a group of anonymous donors, provides resident graduates of the Kalamazoo Public Schools with up to 100 percent of their tuition and mandatory fees for four years at Michigan’s public universities and community colleges. The program is not limited to homeowners, but is meant to attract more residents of all incomes to live in the city and to attend public schools.