Section 8 low-income vouchers now good for home buying
By Michael D. Larson • Bankrate.com

The government has helped tenants pay rent for years under the Section 8 assistance program. Now, it's letting them use that aid to purchase homes.

Under the Department of Housing and Urban Development program, renters who receive Section 8 vouchers to help with the monthly rent can apply their vouchers toward mortgage payments instead.

Lending a helping hand
Low-income households have received assistance in one form or another from the Section 8 program since 1974. Families qualify for voucher assistance if their gross annual income is less than 50 percent of the surrounding area's median income. They have to pay 30 percent of their income (after adjustments for the number of dependents, medical expenses and other factors) toward rent and utilities. But they receive vouchers from local public housing authorities funded by HUD. Those cover the difference between what they can contribute and what landlords charge.

Since the early 1990s, legislators and regulators have tried to devise ways to convert some of those renters into owners the same way they've tried to move welfare recipients off public assistance. In that spirit, HUD launched a test program in 15 cities and states during 1999 that allowed voucher recipients to put their aid toward mortgages rather than rent.

Because of its initial success, the program received final authorization in 2000. The country's 4,100 public housing authorities now have the ability (but not the obligation) to offer the program to voucher recipients in their areas of responsibility.

Consumers looking for more information, such as whether their region's authority is participating, can call their local HUD offices for help.

"Stabilizing neighborhoods is a part of it, but there are lots of other side benefits," says Gerald Benoit, director of real estate and housing performance at HUD. "Once a family tastes homeownership and owns a part of America, that has some motivating factor. People will tend to improve their properties, tend to maintain them and have some pride in them.

"Homeowners have an investment to protect and are more likely to care for their personal property than their rental property."

The program is complex and varies somewhat by location. Housing authorities can use different loan structures to help borrowers. Differences in the price of homes make the product viable in some parts of the country but not in others. Potential buyers sometimes need additional government or nonprofit assistance to get into properties. But a few minimum requirements apply to the program nationwide.

Application requirements
Participants must be first-time home buyers, for instance, and have annual household incomes of at least $10,300. They have to be employed for at least a year and attend free homeownership counseling sessions before buying. Additionally, voucher assistance lasts for just 15 years on mortgages with terms of 20 years or longer and only 10 years on shorter-term loans. After that period, borrowers have to foot the bill themselves.

In a sample situation worked up by Ron Harvey, Section 8 specialist of Affordable Housing Resources in Nashville, Tenn., a single parent with three children earning $23,000 a year who has an auto loan and credit card debt could afford an $80,000 home. Under the Section 8 program, the family could get a $62,000 first mortgage at 6 percent for 30 years from any lender and a $22,000 second mortgage at 6 percent for 10 years from the housing agency. The family would pay $412 toward the first, while Section 8 would pay $250 a month for the second.

Restrictions and obstructions
That kind of arrangement may be common, says C. J. Hager, director of congressional affairs for the Neighborhood Reinvestment Corp. The Washington-based group provides training and monetary support to local affiliates such as Affordable Housing Resources. She says that's because the Section 8 income caps restrict buyers to relatively small mortgages that won't be enough to buy homes in many locales.

Potential borrowers face other program obstacles too. They have to cover closing costs, come up with down payments and qualify for mortgages on limited incomes. Plus, they need to obtain and pay for a home inspection to participate.

That said, nonprofit groups remain optimistic the program will gain steam as more agencies start offering it and work out the kinks.

"With any new option that you get like this, I think in the beginning organizations are going to be conservative," Hager says. "This really is a radical change for a lot of housing authorities and many of them are cautious as a result.

"There are just a few trailblazers who are willing to do this," she adds. "But many of these families who are employed and in every other way qualified to be homeowners just need that extra boost."