overview
The last great innovation in housing finance was the modern 30-year mortgage which emerged in 1957. As the next generation of homeowners faces unique restraints, new tools are needed. These constraints can include higher personal and student debt, tightening access to credit, low wages, a growing number of careers with regular job changes, a longer timeline for family formations, and rapid urbanization to name a few. Creative finance alternatives are essential both for building and rehabbing housing for the future and to allow more people (often renters) to qualify for a mortgage, obtain money for a down payment, or buy a home.
The Basics | Mortgages | Financial Assistance For Renters | Financial Assistance For Homeowners | Land Trusts | Additional Information | Ivory Prize Winners
The Basics
Mortgages
A mortgage is defined as a debt instrument or loan, secured by a piece of real estate, with a defined payback period that the borrower is obliged to follow. Both individuals and corporations use mortgages in order to purchase real estate without paying the entire cost upfront. The borrower repays the mortgage, plus interest, over the life of the loan in order to gain equity and ultimately own the property. In terms of housing, the homebuyer secures the loan through the bank with their home as their asset. The bank, or owner of the mortgage, can foreclose on the tenant, forcing them out and using the sale of the home or land to cover the debt.
Financial Assistance For Renters
Renters face a number of financial and other barriers – especially minorities and those with lower incomes – COVID-19 dramatically increased those burdens. Assisting renters in overcoming these barriers is one of the essential paths to housing affordability.
Credit
Access to credit has become much more restricted since the financial crisis of 2007, banks have become so risk averse that it severely effects the ability of individuals to procure housing. The ability to build credit is essential to obtaining housing. Less than 1% of credit reports include rent, yet for many people it is their largest and most consistent payment. In terms of credit we need to think through the regulatory aspect as well as each individual tenants ability to build their credit in order to provide them with future opportunities.
Security Deposits
40% of Americans do not have $400 in savings. This effects renters in many ways, one of which is the barrier that a security deposit poses when a tenant seeks a new housing situation. It is estimated that nationally $45 billion is currently locked up in cash security deposits. There are many ways that we can solve this problem, in the attached group of articles you will find companies that are tackling this issue as well as research on why finding a solution to this specific problem is pertinent to solving the national housing affordability crisis.
Co-Living
This idea has been very popular in large cities specifically for students or individuals relocating for work. Residents get a private bedroom in a home with shared common areas that have been pre-furnished. This provides an overall cost saving on rent. On occasion landlords match tenants with shared interests. One example of this is the start-up, Nesterly (link below) who matches students in Boston with elderly renters who are willing to provide a discount in rent for help with chores around the house.
Financial Assistance For Homeowners
Home ownership is the number one factor in wealth creation, there is a strong correlation between owning a home and accumulating wealth. Owning a home becomes more effective over time as people are able to build equity and overcome transactional costs as well as any market volatility. The benefits of homeownership can vary based on geographical location. While the approaches below differ, they all share the same goal of helping people afford to buy a home.
Down Payment Assistance
Down payment assistance programs provide a predefined amount of money to qualified buyers. This money goes directly to cover down payment or closing costs and can come from many different groups; local or state government, nonprofits, lenders, etc.
Real Estate crowdfunding
Crowdfunding is a method of investment that works to get many people to invest a small amount of money. This type of investment is typically used when people are looking to raise a large amount of money quickly. In real estate it offers many people the opportunity to invest a small amount of money into real estate and diversify their investment portfolio. This is a relatively new real estate investment model.
Shared Equity Models
Shared equity is also known as shared ownership or co-ownership. Shared equity mortgages are an agreement between a finance company and a borrower to share ownership of a property. After placing a shared downpayment, the finance company and the borrower share in any gains or losses. The borrower typically selects the property and upon closing must occupy the property.
ADU Financing
ADUs, or Accessory Dwelling Units, are an increasingly common way for existing homeowners to make extra income from their property, whether by building a new unit in the backyard or garage or by renting out a room in their home. Currently the options for ADU financing are limited. Current financing options include: a cash-out refinance, a home equity loan or line of credit, and renovation financing. Some states are beginning to experiment with loans specific to ADUS. However, this is an area that needs a solution desperately as ADU legislation continues to pass across the country.
Land Trusts
The use of community land trusts (CLTs) is an increasingly common strategy to ensure the availability of permanently affordable housing for residents who might otherwise be priced out of their neighborhoods. Although they are employed much less often than other approaches to housing affordability, CLTs can be particularly powerful tools in areas facing rapid economic change and appreciation in land values.
Additional Information
Ivory Prize Winners in Finance
2022 Ivory Prize Finance Winner - Blackstar Stability
Blackstar Stability expands equitable ownership of affordable single-family homes by attacking predatory lending practices and restructuring distressed debt products. It works with families with land contracts and similar forms of seller financing to refinance their homes with traditional mortgages, improve their properties, and reduce costs.
2021 Ivory Prize Finance Winner - Homeownership with Keep by Framework
Framework® Homeownership's Keep by Framework helps home buyers understand the process to purchase a home and how best to maintain and stay in that home for the long term. With an emphasis on first-time, first-generation potential homeowners, Keep guides users through the entire process of purchasing a home, with a keen focus on how to assist homebuyers confronting structural and persistent racial barriers, to democratize the homebuying process.
2020 Ivory Prize Finance Winner - Rhino
Rhino partners with building owners and managers to offer low-cost insurance as an alternative to cash security deposits. Acting as an insurer for property damages to the owner, Rhino allows the leasee to avoid the high cost security deposit, and offers low monthly payments instead. The average American has less than $400 in savings. Rhino’s product helps both the landlord and the renter. The landlord no longer has to hold deposits in an escrow account, and the renter avoids cutting into savings for a large upfront deposit. CEO Paraag Sarva developed Rhino after years of experience managing and developing real estate, noticing the “wasted” money that sits in escrow accounts across the nation.
2019 Ivory Prize Finance co-Winner - Landed
Landed is on a mission to help essential professionals (starting with educators) build financial security near the communities they serve. They invest alongside teachers and school staff when they are ready to buy a home in expensive cities. The Landed “shared appreciation” model has broad applicability and could make a significant impact. To date, Landed has helped nearly 150 public school teachers and employees purchase homes valued at $100 million. Landed in helping teachers help put deep roots in their communities.
In high priced communities the down payment is a daunting challenge for many people striving to afford work force housing. The availability of an “equity partner” can be an essential ingredient to achieving homeownership.
2019 ivory prize FINANCE CO-WINNER - HOME PARTNERS OF AMERICA
Home Partners of America (HPA) launched in January 2013 in response to the impact the Great Recession and foreclosure crisis had on millions of homeowners, Home Partners of America has built an innovative financing and operating platform that has enabled thousands of households who currently are not mortgage-qualified to gain access to quality for-sale listed homes in local neighborhoods by participating in their lease-purchase program. Since its launch, HPA has purchased over 12,000 homes in 40 metropolitan markets and 20 states nationwide for a total investment of over $3.5 billion. Over 800 resident households have exercised their “right to purchase” and have successfully purchased their home utilizing the lender of their choice. Beginning in 2019, HPA is now piloting a program to target low-to-moderate income households. This program known as Choice Lease supports residents whose household income is at or below 100% area median income (AMI), with an expected average of 80% AMI. Funding for this program is provided through socially motivated capital.