Overcoming Affordable Housing Finance Challenges

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As millennials age, baby boomers retire and downsize, and costs-of-living continue to rise, the demand for affordable housing is reaching a fever pitch. But as many developers have discovered, determining how to fund an affordable housing project is no small feat. 

Here are a few key challenges you may face, a breakdown of top affordable housing funding sources, and tips to help manage your capital stack.

Challenges of Building Affordable Housing 

Nearly every city needs additional lower-cost housing options, but as costs for construction materials and land continue to rise, finding a way to pay for affordable developments isn’t easy. 

In most cases, lenders base their loans on a property’s anticipated income. And when rent is adjusted to more affordable prices and a property’s expected income drops, so does the amount of money lenders are willing to provide. This creates a funding gap

It’s up to resourceful developers to use a variety of affordable housing finance options to close their funding gap. 

Affordable Housing Funding Sources 

The capital stack for an affordable housing project usually includes a conventional mortgage loan, tax credits, and several other sources of funds, like alternative financing or grants from public or private sources. It’s not unusual for a developer to rely on 20 financing sources to fill the gap between building costs and capital available.

Affordable housing funding sources could include: 

Low-Income Housing Tax Credit (LIHTC)

The Department of Housing and Urban Development (HUD) created this program to incentivize affordable housing development. LIHTC provides credits to state housing finance agencies to allocate to developers, who in turn typically sell them to investors to fund the project. There are two types of LIHTC credits—9% credits and 4% credits—and being awarded a 9% credit will help to finance the majority of a development. To qualify for a tax credit, proposed affordable housing projects must meet a use restriction. For example, they must dedicate at least 20 percent of apartments to people who earn less than one-half the area’s median income, or 40 percent of apartments to people who make less than 60 percent of the area’s median income.

Community Development Block Grant

Also known as CDBG, this federal program provides funds to state and local governments to distribute for community development projects. To receive these funds, local governments must submit two annual performance evaluation reports to HUD. 

HOME Investment Partnership Program 

HOME is the largest block grant for state and local governments. It’s awarded annually to help develop communities and strengthen partnerships between the government and private sector for better affordable housing development. Jurisdictions must match 25 cents of every dollar and ensure housing remains affordable for 20 years to qualify for this option. 


221(d)(4) is HUD’s construction loan program for both affordable and market-rate housing. These loans are sizable—typically more than $10M—and unlike conventional bank financing, the terms won’t change with the market. Developers pay interest-only during construction years, which gives up to three additional years of financing at the same fixed rate. 221(d)(4)s are often more expensive for developers up front and can take up to a year to secure because the FHA lender and HUD each underwrite the transaction. 

How to Simplify Affordable Housing Finance Management 

As you can imagine, managing multiple funding sources can get messy.

Government tax credits, grants, and other programs often place strict requirements on how developers can use funds. Developers may be required to only use certain funds to pay for specific hard costs and no soft costs. 

There’s also a lack of standardization among funding sources. Tax credits and subsidies award processes run on different timelines and require different applications, so winning one grant and having to wait six months for another can be detrimental to a project. 

While it’s critical communities develop more affordable living options, the burden of identifying funding sources and managing affordable housing finance mainly falls on developers. The good news is, construction finance software can help streamline the process and eliminate much of the administrative legwork.  

For example, Rabbet supports unlimited funding sources and tracks fund use at a line-item level. It also verifies documents against each lender or source’s standards to ensure you remain compliant. This way, you can retain your funding, pay vendors, and keep your project moving forward. Best of all, because it’s automated, you won’t have to waste time manually updating and reviewing complicated spreadsheets.  

Despite an ever-growing need for affordable housing, finding funding sources and managing your capital stack has become more complicated than ever. With a reliable construction finance platform, you can ease the burden and get your projects finished. 

Rabbet helps you quickly and accurately track the uses of your funding sources. Learn more »