Date Published: March 2019
CDBG grantees must verify the income of the household in order to determine its eligibility. Using this information, the grantee can establish a standard for how much of the household's gross income can be allocated to housing costs; a commonly-used standard is about 30% of adjusted gross income for principal, interest, taxes, and insurance (PITI). In many cases, PITI charges exceed 30% of the household's income.
The example below shows how underwriting can calculate the appropriate level of subsidy.
The family can afford $10,800 in annual PITI expenses. In this example, they have $1,450 less per year than they need ($12,250-$10,800). The taxes and insurance do not change, but the grantee can make a grant or soft second mortgage to eliminate the gap. Deducting the taxes and insurance from the 30%-of-income figure shows that the family can afford $6,800 for a mortgage payment. Then, one would use a mortgage calculator to determine how large a mortgage can be supported with the $6800 the family can afford to spend on principal and interest. This annual payment amount will support a mortgage of $118,695, at the same 4%, 30-year terms.
Revised affordability calculation:
The grantee would therefore reduce the principal amount of the mortgage by $25,305 and take a soft second mortgage to secure it. Adding the $4,000 in taxes and insurance keeps the total annual housing cost at the $10,800 level that the household can afford on 30% of its gross income.
At the grantee's option, it could also pay 50% of the downpayment on behalf of the family. The $25,305 soft second mortgage amount dwarfs the $3,000 that is half of the downpayment, but both forms of subsidy are eligible. However, even though it has substantially more invested in lowering the mortgage amount, the grantee cannot pay more than 50% of the downpayment. The downpayment involves equity and the homeownership assistance adjusts debt.