homeownership challenges

Policy: Basics of Homeownership

Overcoming the Challenges to Homeownership
For many Americans, owning a home is one of life's great goals. Prior to the 2008 recession and foreclosure crisis, homeownership in the United States was at an all-time high, with two-thirds of all households owning their homes. Since that time, the rate has declined across the country. High home prices and economic uncertainty have pushed Massachusetts residents toward the rental option, but even rental properties leave households "housing burdened." [Note 1] Nevertheless, it is important for affordable housing advocates to understand the basics of homeownership.

Potential homeowners often face one or more of the following challenges:
  • Information gap—lack of information, or confusion, about how to buy a home (including how to establish and maintain good credit)
  • Wealth gap—lack of money for a down payment and closing costs
  • Income gap—insufficient stable income to qualify for a mortgage
  • Supply gap—inability to find desirable housing in an appropriate location

Click on the links below to learn more about the challenges of homeownership:

Information Gap
Strategies like homebuyer education and counseling can help potential homeowners overcome challenges of a lack of information, or confusion, about how to buy a home.

Wealth and Income Gap
A variety of programs can help to close the wealth and income gaps and put families on a path to sustainable homeownership.

Supply Gap
Local production initiatives and other programs can address the supply gap and help families find desirable housing in appropriate locations.

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Overcoming the Challenges to Homeownership

Other pages in this section:

Hyde-Jackson HomesAlternative Development Models
Learn about development models that communities can use to manage the scarcity of resources for affordable housing.

Elm Brook Homes Alternative Ownership Models
Learn about ownership approaches, such as community land trusts, that can help communities
keep homeownership units affordable permanently.

Go back to learn about other policies in the Massachusetts Toolkit

Addressing the information gap

Homebuyer Counseling and Education
Homebuyer counseling and education are valuable marketing and outreach tools that can bridge the information gap and expand the pool of potential homebuyers, preparing them for a successful application and ownership experience. If your community is planning a first-time homeownership initiative, consider partnering with an agency or institution that provides homebuyer counseling and education workshops.

There are more than fifty nonprofit agencies throughout Massachusetts that offer this service. Staff are trained, monitored, and certified by the Massachusetts Homeownership Collaborative, which is coordinated by CHAPA. In addition to conducting workshops in a number of different languages, these agencies provide "soup to nuts" information about the
Orchard at Cold Spring Commons
Photo Credit Greig Cranna, Courtesy of MassHousing
home buying process, from how to repair damaged credit to current mortgage products and down-payment assistance programs. Both pre-purchase and post-purchase workshops are available.

For a list of counseling agencies and their current and planned activities, including a calendar of upcoming workshops, click here.

Communities creating homeownership programs should note that most homebuyer counseling agencies maintain lists of their "graduates," a valuable marketing resource for outreach to potential homebuyers who traditionally have had little contact with conventional financial services.

For a list of counseling agencies certified by the Massachusetts Homeownership Collaborative, click here.

Each of the nine Massachusetts Housing Consumer Education Centers provides information on homebuyer education and other issues relating to homeownership, rental and transitional housing and support services, state and federal subsidies, and public/private rehabilitation resources for homeowners and landlords.

MassSaves is a program of the Massachusetts Financial Education Collaborative, a consortia of public and private interests established to ensure that all Massachusetts residents have access to high-quality financial education programs, information and materials. MassSaves is affiliated with the Midas Collaborative, a statewide group of community-based nonprofit organizations committed to assisting residents in building assets and achieving greater economic stability.

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Addressing the wealth and income gap

There are several programs designed to bridge the wealth and income gaps by making it more affordable for first-time homebuyers to purchase homes. Tools include subsidized interest rates, assistance with down payments and closing costs, and flexible underwriting. Massachusetts Housing Partnership's SoftSecond® Loan Program (loans funded through participating private lenders such as banks, thrifts, and mortgage companies) and MassHousing's mortgage programs (Purchase and Rehab, A Home for the Brave, and Buy Cities) offer some of these advantages. Though more restrictive since 2008, these programs are still more accessible than conventional mortgages.

The widely used Massachusetts SoftSecond® Loan Program offers low down payments and favorable underwriting, and it eliminates the need for private mortgage insurance. Most importantly, it reduces a borrower’s monthly costs by dividing the loan into two components: a conventional first mortgage (usually for 77% of the purchase price), and a subsidized second mortgage (usually for 20% of the purchase price).

Interest alone is paid on the second mortgage for the first ten years, and public funds may be used to subsidize the interest rate during the early years. In year eleven, the homeowner starts to pay the full amount. This technique enables homebuyers to qualify for larger mortgages than they would otherwise. The statewide program, with more than 30 participating lenders, has helped 15,000 households become homeowners since its inception two decades ago.

Income eligibility is set at 100% of median income for the area. Interest subsidies are available only to borrowers at or below 80% of median income. In greater Boston, the maximum allowable income for a family of four was $96,500 as of 2011. In some other parts of the state, maximum allowable income may be lower. To learn about the income eligibility for a
SoftSecond® Loan, click here.

For more information on MassHousing mortgage products, click here.

Additional Resources to Address the Income and Wealth Gaps

Individual Development Accounts (IDAs), available through the Midas Collaborative, offers a combination of matched savings programs. Investors commit to saving a monthly fixed sum in a dedicated savings account for one to two years. Midas matches their savings with a 1:1 to 3:1 ratio, enabling savers to build their accounts and purchase a "life-changing" asset, such as a home. In 2010, the 413 active investors at 20 Midas sites saved $374,000 and accrued a match of $738,000 to total $1.1 million.

The Family Asset Building (FAB) department of Lawrence Community Works, a Midas affiliate, enables families to build savings, skills, and literacy. The program includes IDAs, in which a participant's savings is matched 3:1 or 4:1 toward sustainable asset ownership. This program comes with intensive financial literacy training, credit counseling, and peer support.

Another Midas affiliate, Springfield Partners for Community Action also offers IDAs. Since 2005, this program has helped 30 residents become homeowners.

The Section 8 Homeownership Voucher Program allows Section 8 recipients to apply that subsidy toward homeownership, with certain parameters. Some high-cost communities have provided funding to "buy down" purchase prices to help people qualify.

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Addressing the supply gap

Local production initiatives
Local production initiatives include any efforts that increase the supply of moderately priced housing by creating new units. The Local Initiative Program (LIP), an offshoot of Chapter 40B, gives cities and towns more flexibility in their efforts to create low- and moderate-income housing.

The most significant difference between a LIP (also called a "friendly 40B") and other Chapter 40B developments is that the developer first gains approval of the town's board of selectmen or the city's board of aldermen. In addition, a LIP development offers no state or federal financial subsidy. However, it allows similar zoning relief and the ability to count affordable units on the subsidized housing inventory as long as the units meet profit limits, income limits, long-term use restrictions, and affirmative marketing. DHCD provides technical assistance to the community in the form of project review pursuant to regulatory guidelines for LIP projects.

In addition, localities may be allowed to reserve up to 70% of the affordable units for "local residents" defined by DHCD as residents, town employees. employees of businesses located in the the community, and households with children that attend the public school.
The limiting effect of the local preference is offset by affirmative marketing requirements.

DHCD requires an affirmative marketing plan for each project with a goal of achieving minority ownership or tenancy in the affordable units equal to the percentage of income-eligible minority households in the community or those in the MSA, whichever is greater.  Click here to read more about developing an Affirmative Fair Housing Marketing Plan.

Between 1990 and 2006, 318 LIP projects were approved, creating 10,574 housing units. Of these, 2,894 were affordable. (FN) If a community and its development partner have been proactive and have made the most effective use of the tools they control and still a gap remains, the state can tap its Affordable Housing Trust Fund to fill it.

DHCD will also recognize affordable units gained through inclusionary zoning or other local municipal action, such as the use of a special permit, the conveyance of public land, or the utilization of Community Preservation Act funds, provided that the affordability is in perpetuity and certain other conditions are met. Units created under this mechanism are called Local Action Units and are subject to their own set of DHCD regulations.

Communities that have recently used local production initiatives include:
  • Bedford – Six two-bedroom affordable townhouses are being offered to qualified homebuyers by lottery at the Hartwell Farms property in Bedford. Information about this site and the lottery process is available here [PDF].
For more information on the Local Initiative Program, click here.

Purchase of existing units for resale with affordability restrictions
The purchase and resale of existing housing to income-eligible homebuyers is another way a community can increase homeownership opportunities and add to their qualified inventory of low- and moderate-income housing.

Nonprofit development entities often purchase the least expensive units on the market, make required repairs, and write down the cost, if necessary, to make the price affordable to low- or moderate-income households. Long-term affordability restrictions are imposed. Affirmative marketing is required, but local preferences are allowed. Typically, purchasers are selected by lottery.

A number of communities have explored variations of this model, but it is becoming more challenging. The least expensive units are often bid up by those seeking to tear down and rebuild on the site. In some cases, a desire to benefit one's community, coupled with the tax benefit of selling to a nonprofit, is enough to convince a seller to work with the community to create housing with long term affordability. In other cases, towns have enacted programs that involved the purchase of moderately priced market-rate condominium units by the town with the intent to deed restrict and resell to income-eligible, first-time homebuyers. As market conditions have minimized the difference between market and affordable prices, these types of programs have become significantly harder to find. For a more elaborate discussion of challenges and opportunities in purchasing existing units, go to the policy section on "Preserving Existing Properties."

Self-help housing
Programs that use the homebuyer's labor (sweat equity) and/or the volunteer labor of others can reduce the cost that gets passed on to the homebuyer. There are two basic models of self-help.

  • The mutual self-help model allows families with limited incomes to buy their own homes by contributing their labor in the construction of the house. Typically, self-help groups of six to twelve households work together, with no household moving in until all of the group's homes have been completed. In some parts of the country, participants perform as much as two-thirds of the required labor, under qualified supervision, substantially lowering the cost. Locally, homeowner contribution has been more limited.
  • The non-owner volunteer labor model lowers construction costs by seeking donated labor and construction materials from the community, with some labor required of the prospective owner. Habitat for Humanity, (HFH), the largest self-help organization in the state, has used this approach to build some 200 units of affordable housing.

Both approaches require effective management and oversight to ensure that the savings achieved through donated materials and/or labor aren't eaten up by costly mistakes and inefficient use of time.

Self-help housing has been unable to achieve the economies of scale needed to solve the affordable housing shortage, but projects of this sort—particularly on town-owned or privately donated sites—can coalesce broad-based community support for affordable housing initiatives. Self-help has also been effectively employed in several of the state's rural communities, where the single-family tradition of homeownership is so deeply rooted. Franklin County communities have a long track record of working with the U.S. Department of Agriculture's Rural Housing Service programs. More recently, Habitat for Humanity MetroWest/Greater Worcester has initiated a veteran's program to help veterans repair and adapt their homes. For more information on this recent initiative, click here.

The national nonprofit Housing Assistance Council in Washington, D.C., under a contract with HUD, offers services to public, nonprofit and private organizations throughout the rural United States, including training on administering self-help housing programs. For more information, click here.

For a comprehensive overview of the self-help housing development process, focusing on rural areas, click here.

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1. Boston Globe article re Report on Housing Burdened July 2011