Local Housing Solutions
To enhance local affordability. To foster inclusive communities.

How Is Affordable Housing Funded?

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Introduction to the types of assistance that affordable housing developers use to fill the funding gap for affordable housing

The rents that low- and moderate-income households can afford to pay are often too low to cover the full costs of owning and managing a rental property. This gap between the funding needed to develop and operate a property and the revenue available is called the affordable housing funding gap.

To fill the gap, developers usually need help in the form of a subsidy. The subsidy most often comes from local, state, or the federal government, but it can also come from other sources. The subsidy can be used to help cover construction costs, rents, or operating costs. Assistance with construction costs reduces the amount the developer needs to borrow, and therefore reduces monthly financing costs. Rental assistance helps tenants pay the rents needed to cover costs. And operating subsidies reduce the rental income needed to keep the property financially afloat. Depending on the specifics of a project, it may need one, two, or all three of these kinds of assistance.

What types of subsidies are used to help fill the affordable housing funding gap

Hard debt

  • Mortgages
  • Taxable or tax-exempt bonds

Soft debt

  • Local loan funds
  • Mortgages with below-market interest rates

Equity

  • LIHTC
  • Federal Historic Tax Credit
  • State Tax Credits
  • State Historic Tax Credits

Grants and other subsidies

  • State grants, subsidies, energy funds, loan funds, and tax incentives
  • Land donations
  • HOME Investment Partnerships (HOME) Program
  • Community Development Block Grant (CDBG) Program
  • Deferred developer fees
  • General Partner (GP) capital
  • Federal Home Loan Banks (FHLBs)
  • Affordable Housing Program (AHP)
  • Local grants
  • National Housing Trust Fund Foundations
Developers often assemble many sources of subsidies to help fill the affordable housing funding gap. Construction subsidies, most often in the form of a federal program called the Low Income Housing Tax CreditA dollar-for-dollar tax reduction against federal tax liability, provided to developers based on the criteria set out in the states’ qualified allocations plan. It is the primary source of funding for increasing and preserving supply of affordable rental homes., are the most common. Others include mortgages with below-market interest rates, tax-exempt bondLong-term loan or debt security issued by corporations or the government. Typical length of maturity is 10 years or more after being issued.s, local loan funds, federal and state tax credits, federal grants or loans from programs like the HOME Investment Partnerships Program (HOMEFederal program established by Congress in 1990 that is designed to increasing decent affordable housing for low- and very low-income families and individuals. State and localities receive HOME fund from HUD each year, and spend it on things such as: rental assistance, assistance to homebuyers, new construction, rehabilitation, improvements, demlition, relocation, and administrative costs.), local grants, land donations, contributions from charitable foundations, and deferred developer fees. Once sufficient sources of funding are identified to create the housing, additional subsidies may be used to help pay for the costs of operation. For example, some units may have rent subsidies that supplement the rent the tenant can afford to pay. And properties that serve special needs populations are likely to have operating cost subsidies to help pay for the supportive services provided.

Why do developers use so many different sources of subsidy

Developers generally use the fewest number of subsidy sources possible because each additional source of subsidy makes funding more complex. For example, each subsidy comes with its own set of legal restrictions. But the truth is that, to reach the lowest income families with the greatest needs, a developer may need to cobble together multiple subsidy sources to make the project financially feasible.

A project is not feasible unless it covers 100% of its funding gap, so every source of funding matters. A small local contribution can be the critical investment that makes the project work, allowing the project to proceed and the community to benefit from a large amount of federal subsidy that would otherwise flow to a different community.

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