Down Payment Assistance Programs: Building a Bridge to Home Ownership

Costly down payments are a major barrier to home ownership for many Americans. Medium and even some low-income workers and their families may earn enough to afford monthly mortgage payments, but often struggle to save enough for a down payment. According to a recent Urban Institute report, high housing costs fall hardest on Black families, who are less likely to own homes than white families with comparable income and educational attainment. The U.S. Department of Housing and Urban Development has found that as communities and regions grow more racially and economically segregated because people can’t afford homes in the region where they work and live, quality of life suffers. 

Down payment assistance (DPA) programs can help bridge the gap. These programs provide financial aid in the form of loans or grants to income-qualifying buyers that allows them to live in their home communities and start building equity. While their exact form and details  differ, these programs offer a valuable tool for cities and counties seeking to address the current housing affordability crisis.

Many established DPA programs in California depend on federal and state grant programs. But cities and counties also finance DPA programs with local revenue sources such as municipal bonds, linkage fees, and in-lieu fees tied to inclusionary zoning policies. Some communities have found that robust community support can lead to meaningful private fundraising.

Municipal Bonds

Local governments can finance DPA programs by issuing municipal bonds that are financed through property taxes. Recently, voters in two Bay Area counties—Santa Clara and Alameda—passed new measures that authorized their counties to raise $950 and $580 million, respectively, through bond issuances to support affordable housing programs. Both counties financed the measures through increased property taxes on the order of $11-14 dollars per $100,000 of assessed property value. 

Both Counties have assistance programs with deferred payment, shared appreciation loans. No monthly principal and interest payments are required. Payment is deferred until the loan reaches maturity, is sold or refinanced, or is no longer occupied. At that time the loan principal is repaid plus a share of the home’s appreciation based on the loan amount. If the loan was for 10% of the home purchase price, for example, the homeowner would repay the original loan amount plus 10% of any increase in the home’s value. (In Santa Clara County the share appreciation is capped for the first ten years of the loan.) 

The Santa Clara County program has dedicated about $150 million to working family and homebuyer assistance programs. In Alameda County about $50 million is dedicated to a DPA program. The program covers families previously displaced from Alameda County, even if they  no longer work or live within the County. The program also gives some preference to educators and first responders.  

As agency-sponsored tax measures, both the Santa Clara and Alameda County measures required a two-thirds supermajority approval by county voters. Alameda’s measure received 72 percent of the vote and Santa Clara’s passed with 67 percent. Under the Court of Appeals’ recent decision in City and County of San Francisco v. All Persons Interested in the Matter of Proposition C, tax measures proposed by a voter initiative require only a simple majority for approval. A petition for review was recently denied by the California Supreme Court, so cities and counties may see voter-sponsored tax measures oriented towards housing affordability programs.

Linkage fees and impact fees

Commercial linkage fees and affordable housing impact fees are fees that local governments assess on new commercial and other non-residential development and on market-rate housing to address the development’s impact on the demand for affordable housing as identified through a nexus study. These fees are generally deposited into a dedicated housing trust fund and spent on various affordable housing initiatives, including DPA programs. 

The San Diego Housing Commission (SDHC) follows this model. It imposes fees on both commercial and residential development to support affordable housing. SDHC dedicates a portion of these funds to provide deferred-payment/3 percent interest loans of up to 17 percent of a home’s purchase price plus a portion of closing costs for income-qualifying, first-time homebuyers in the San Diego area. SDHC also draws funding for its DPA program from other sources, including federal and state grants.

Inclusionary zoning “in lieu” fees

Many cities in California have passed inclusionary zoning policies that require developers to make a portion of new developments affordable and available at below market prices. Often, these cities allow developers to depart from these requirements provided they pay a fee in lieu of building the required units. Fees are then used to fund affordable housing efforts such as DPA programs.

Napa County’s Proximity Housing DPA Program is partially funded by in-lieu fees. The program offers shared appreciation loans worth up to 10 percent of the home’s purchase price to income-qualifying families with members who work in or around Napa County.

Private fundraising

Some DPA programs are funded partially through private donations. In San Mateo County, the Housing Endowment and Regional Trust (HEART) works in partnership with Meriwest Mortgage, a credit union, to provide 15-year, below market rate down payment loans to income-qualifying, first-time homebuyers who live or work in San Mateo County. These loans require no private mortgage insurance and require only a 5 percent down payment directly from the purchaser. HEART is a Joint Powers Authority comprising all twenty cities in San Mateo County, plus the County itself. The County provided $3 million in seed funding at the outset and the authority has since raised over $14 million, largely through private donations. While HEART dedicates most of its funds to building new affordable housing, roughly $1.1 million of HEART funds have gone to support loans to homebuyers.

Federal and state funding sources

Local governments can draw on federal and state funding sources to support their local DPA programs. Notable federal sources of funding include the federal Neighborhood Stabilization Program and HOME Investment Partnerships Program.

California cities and counties can also avail themselves of state-administered programs such as CalHome, which awarded almost $62 million in grants to various low-income homeownership projects, including first-time homebuyer DPA programs. These funding pools include state bonds and federal grants, as well as certain types of statewide fees. For instance, California in 2017 passed the Building Jobs and Home Act, which committed a $75 increase in real estate recording fees to support affordable housing efforts. Seventy percent of the funds in this pool supports grants to local government programs, including programs that promote home ownership among low- and moderate-income Californians. 

For more information, contact SMW attorneys Richard Taylor or Heather Minner.

By Richard Taylor and Julian Zhu

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