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Better Understand HUD 2023 Income Limits

Published by Thomas Stagg on Friday, May 26, 2023 - 12:00AM

For the second year in a row, U.S. Department of Housing and Urban Development (HUD) income limits to determine eligibility for HUD-assisted programs and low-income housing tax credit (LIHTC) properties increased in more than 98% of areas–but for the second year in a row, the increase was limited in the majority of areas due to HUD’s cap on income limit increases. HUD released income limits May 15.

Year-over-Year Change

Income limits continued to trend upward. In fact, only 54 areas had income limits that were lower than 2022. This is great news for tenants who are trying to qualify for affordable housing–as higher limits mean more people can qualify. Ninety-eight percent of areas had an increase in their income limits. The average increase across all areas was 5.45%. The increase was similar in non-metro (5.47%) and metro areas (5.38%).

Impact of the Cap

For the past two years, the story of income limits has been HUD’s cap on Very Low Income (VLI) limit increases. HUD has applied a cap to changes in VLI since 2010. The cap (and floor) is designed to address outliers in the American Community Survey (ACS) data so that an area does not have large swings in income limits year-to-year due to the ACS data.

Excluding 2022 and 2023, on average  about 10% of areas were capped in any given year and 3% were floored. However, in 2022 and 2023, we saw a dramatic shift in the number of areas that were capped. For 2022, 57% of areas were capped and in 2023, 87% of areas are capped.

Blog Graphic: Historical Percentage of Areas that Were Capped or Floored

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The cap on increases is the greater of 5% or twice the change in national median income.

The change in the number of areas capped was a result of HUD changing how it calculated the “change in national median income” in 2022.

From 2010 to 2021, HUD used the HUD-published national median income for calculating the cap using the following formula: For example, the cap for 2020 was calculated by doubling the change in the national median income from 2019 to 2020, which resulted in a cap of 7.9%. It is important to take a little detour and discuss how the HUD national median income is calculated–it is calculated by taking the ACS data from three years previous and trending it forward using a consumer price index (CPI) trend factor.

In 2022, HUD changed its calculation and instead of using the HUD-published national median income, it used the change in the underlying ACS data. Therefore, the cap for 2022 is calculated by taking two times the change in the ACS national median income from 2018 to 2019.

When looking at the two methods side-by-side, the only difference in the calculation is the dropping of the CPI trend factor.

Blog Graphic: Old Method 2022 Cap, New Method 2022 Cap

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Both methods use the same ACS data. The old method used CPI to account for any changes to the economy and incomes since the ACS was published, the new method does not and benchmarks the cap to the change in the historical ACS.

HERA Special Not Affected by Cap

The most common question is whether the cap applies to HERA Special and why not. To understand this question, it’s important to first understand what HERA Special Income limits are. HERA Special income limits are a special income limit that is only applicable to projects in service before 2009. The Housing and Economic Recovery Act (HERA) of 2008 created a new income limit calculation only applicable to areas that had their income limits published under HUD’s old hold-harmless policy. These areas were given a special calculation where the percentage change in area median income (AMI) is added to the 2009 VLI–which serves as the baseline for the calculation. The calculation is: (current year AMI/2008 AMI) x 2009 VLI.

Here's the calculation for 2023 for Durham-Chapel Hill, North Carolina HUD Metro FMR:

($116,220/$62,100)x$35,650=$66,700.

As mentioned before, the income limits for HERA Special areas are not capped. This is because the calculation for HERA Special limits is prescribed by Section 42 of the Internal Revenue Code and are calculated based on the change in AMI, which HUD does not cap. The average increase in HERA Special counties was 10.40% compared to 5.45% for VLI areas.

Continuing to look at the example above, the HERA Special income limit for Durham-Chapel Hill, North Carolina HUD Metro FMR is a 22% increase over 2022. However, the increase for regular VLI was capped. Therefore, in this area, a project in service before 2009 will be able to increase its income limits by 22% but post-2008 projects will be limited to a just under 6% increase. This will allow pre-2009 projects to be able to qualify tenants who would not qualify in post-2008 LIHTC projects. The four-person VLI for Durham is $50,550–therefore four-person households making between $50,550 and $66,700 will be able to qualify for a 50% unit in pre-2009 projects but would not be able to qualify for a 50% unit in a post 2008 project.

Non-Metro Median Adjustment Capped by HUD For First Time

Another change to income limit calculations that was part of HERA was that projects located in rural areas, as defined by the United States Department of Agriculture, can use the greater of the national non-metro median income (NNMI) or the income limit for their county. On HUD’s website, it publishes both the NNMI income limit and a 50% limit based on the NNMI. Historically, the published 50% limit has been equal to 50% of NNMI. However, in 2023, HUD published a 50% limit that was subject to the cap discussed above.

Internal Revenue Code Section 42 instructs that LIHTC owners should use the NNMI when doing this adjustment, so it is unclear why HUD has published a capped figure for 2023. In 2022, the NNMI increased by greater than the cap and no cap was applied by HUD.

To be conservative, the Novogradac Rent and income Limit Calculator© is using the capped amount, however, the Income Limits Working Group is working on a comment letter to HUD seeking to clarify why HUD has published a capped amount. If you have a project in a rural area, please discuss with your state agency the appropriate treatment.

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