Beyond Lending: The Changing Role of Banks in Affordable Housing Finance

The housing affordability crisis in the U.S. continues to show no sign of easing. In 2025, the national U.S. median rent is $1,375, a nearly 20% increase over five years despite a 4.6% drop from the mid-2022 peak. That rise has exceeded wage growth by 1.5 times.  A shortage of seven million affordable rental homes creates additional challenges for low-income renters, according to the National Low Income Housing Coalition.

Closing the affordable housing gap requires collaboration between multiple stakeholders. Traditionally, developers focused on building, investors supplied equity, government agencies provided subsidies, and banks functioned primarily as lenders.

This siloed approach is no longer sufficient in today's complex environment. Projects typically require funding from multiple sources, and real estate developers that are new to affordable housing have begun to enter the market. To support these shifts, banks have evolved from simply providing loans to becoming strategic partners throughout the development process. They now offer expertise in structuring complex capital stacks, connecting developers with investors, navigating regulatory requirements, and creating innovative financing solutions when gaps emerge.

By understanding these expanded capabilities, developers can engage their banking partners earlier and more strategically to overcome the increasingly complex obstacles to creating viable affordable housing.

Challenges in Affordable Housing Financing

Securing financing for affordable housing is growing in complexity. Developers must navigate a fragmented landscape, assembling multiple funding sources—tax credits, grants, and private capital—with distinct eligibility criteria, disbursement schedules, and compliance requirements. These factors make it harder for developers to keep projects within budget, requiring additional financing or scale-back plans to maintain financial feasibility.

Rising construction costs further strain budgets, with materials and labor expenses escalating due to supply chain disruptions, workforce shortages, and inflation. Lumber, steel, and concrete prices have significantly increased. The residential building segment has seen more dramatic cost increases, with hourly earnings growing sometimes by roughly 10% month over month.

These cost surges make it harder for developers to keep projects within budget, often requiring them to secure additional financing or scale back plans to maintain financial feasibility. Recent shifts in trade policy and immigration enforcement have further complicated the landscape. Tariffs are expected to drive up the cost of imported construction materials, while tighter labor availability, particularly among skilled trades in construction, has added to the pressures.

Finally, project timelines remain unpredictable. Delays in securing subsidies, shifting local policies, and macroeconomic factors such as interest rate fluctuations can force developers to reassess financial structures midstream. Delays intersect with increases in material and labor costs. In this environment, traditional financing often supports only part of the costs, requiring innovative and flexible financing to keep projects viable.

Evolution of the Affordable Capital Stack: What Developers Need to Know

As developers navigate various state-level tax credits, workforce housing incentives, and sometimes philanthropic contributions, layering and timing these elements require careful financial structuring to ensure funds are available when needed while complying with investor and government requirements.

Additionally, the role of federal versus state and municipal funding has shifted, placing more responsibility on state authorities to fill financing gaps. The Low-Income Housing Tax Credit (LIHTC) remains a cornerstone of affordable housing finance, but state and local programs such as municipal grants, housing authority funds, state housing trust funds, and local tax incentives now account for a larger share of financing than in previous decades.

Developers must account for these trends and ensure their projects align with local housing priorities to maximize funding.

However, accessing these funds requires coordination among banks, developers, and government agencies. Successful projects need early coordination to secure tax credits, grants, and financing. When public funding priorities shift, private-sector solutions such as bridge loans or impact investments become essential to maintain momentum and ensure project feasibility.

Banks act as essential trusted advisors and partners throughout.

Affordable housing projects rely on a complex capital stack.

Debt financing:

• Bank balance sheet non-bank loans for construction and permanent financing
• Agency financing (Freddie Mac, Fannie Mae, and FHA)
• Provides predevelopment loans capital

Equity Investments:

• Primarily sourced through the Low-Income Housing Tax Credit (LIHTC) and other state tax credits
• Typically provided in installments

Public subsidies:

• Grants, tax-exempt bonds, or soft loans from federal, state, and local government entities
• Ordinarily have regulatory requirements
• Disbursement schedules vary

Navigating Complexity: Working with Banks for Successful Financing

Managing today’s financing challenges requires early engagement with banks. Effective partnerships depend on banks meeting developers where they are, offering advanced structuring support to experienced players while providing guidance and technical assistance to those newer to affordable housing finance. By involving financial partners from the outset, developers can identify viable funding strategies, anticipate gaps, and secure the right capital mix before issues emerge. This proactive approach helps streamline approvals, align funding timelines, and improve project feasibility.

Key strategies include:

• Aligning funding sources: Different programs have varying timelines and requirements. Developers must structure financing to ensure funding aligns with project milestones, allowing efficient capital deployment and avoiding costly delays. Input from banks can help coordinate the timing of loans, tax credit equity, and public funding sources of the project that support each development phase.
• Providing credit enhancements: Flexible underwriting, including tailored loan terms or risk-sharing, can help developers secure funding that is in sync with their project’s needs.
• Mitigating risk: Economic shifts, regulatory changes, and construction overruns can affect project feasibility, timing, and completion. Unanticipated funding delays can push back schedules, while rising costs can force developers to secure additional financing mid-project. By incorporating contingency planning and diversified funding strategies, developers can safeguard against unforeseen disruptions.

The Wide Role of Banks in Affordable Housing

• Acting as trusted partners and facilitators
• Offering strategic support
• Helping with layering and timing of financing elements
• Providing coordination between stakeholders
• Serving as trusted advisors
• Assisting with fund source alignment
• Providing necessary credit enhancements
• Aiding risk mitigation strategies

The Future of Affordable Housing Funding

The affordable housing finance landscape is shifting. Federal funding for housing programs may fluctuate, placing greater emphasis on state and local initiatives. Developers should monitor new state-level subsidy programs and tax incentives to leverage emerging opportunities.

Private-sector participation is increasing. Beyond traditional banks, debt funds and insurance companies are entering the space, offering additional capital options. These new players can provide creative financing solutions, but developers must understand how to structure deals that align with private investment expectations.

Partnerships are becoming more critical. LIHTC investors are increasingly working across larger deals, and regional banks are teaming up with major institutions to expand project financing. Banks are no longer just lenders. They are strategic partners who help structure deals, arrange funding, and fill critical financing gaps. They are also evaluating projects not just by return on capital, but by return on mission (understanding their role in advancing long-term community outcomes alongside financial performance). By leveraging these partnerships, developers can ensure project success in an evolving market.

Author: Lopa Kolluri

With over 25 years of experience in affordable housing, Lopa Kolluri has worked across federal, state, and local levels in financing, development, and policy. Her perspective is shaped by both public service and private sector roles, with experience on the developer and lender sides. She joined M&T Bank in June 2022 and was appointed Head of Affordable Housing Lending in August 2024.