How Section 8 Tenants Can Buy A Home

The Section 8 program is the common term for the Hud Housing Choice Voucher program.  Section 8 covers a large portion of a low income tenants rent, and the tenant pays a small income based portion of the rent, in many cases the tenant’s portion is $0.   Section 8 in general is not a well designed program.  Section 8 may have 10X the number of people who qualify than the amount of people who receive benefits.  The people who do receive benefits often receive them forever, while the other qualified tenants are stuck on a waiting list for years.  It’s certainly not a fair system.  It would be much better for them to cover say 25% of the rent for 4X as many people.

Michigan Section 8 Key To Own Program:

In Michigan there is a program called “Key To Own” With the goal of the program is to transition Section 8 recipients from tenants to owners.  The program is set up so that after the Section 8 participant buys a house Section 8 continues to pay housing assistance to the participant, instead of to a landlord.  Some of these guidelines are national and will be the same in every state, while some are state specific.

This program is not highly used.  As of July 2022 there were over 100 Michigan public housing agencies that issues Section 8 vouchers, but only a few offered the ownership program. The overall goal of the state is to expand the program so that more people will be able to become home owners.  This ends up being less expensive for the Section 8 program and provides a larger benefit to the participant. As of January of 2022 the state had around 35,000 voucher holders. Since the inception of the Key to Own program there have been 650 closings total, with around 50 per year.  This means in a given year only 1 out of 700 voucher holders completes the home buyer program.  Major Challenges to the program currently are:

• Lack of inventory and high competition for houses, especially entry level houses.
• Local housing authorities that have not set up the house purchase program.
• Houses that need repairs (talking to sellers to allow repairs, getting help from family, getting help from big box stores to donate materials)
• Getting credit scores up ahead of time

Participants need to pull their free credit report and demonstrate 2 months of bank statements  with needed funds, $500 earnest $500 appraisal $300 inspection ($1,300  total personal funds requirement). They receive a  packet that explains everything they need to do in detail, step by step.  This welcome packet reduces calls/emails. The statewide program is very short staffed with only 2 people in department.

Michigan has also worked with several lenders to make the process straight forward for the Section 8 Key to Own department and for the clients purchasing their home.  They have worked with lenders to ensure they get the same loan officer, the same under writers, the same processors for each home in the program that the bank works on, so that retraining for the specifics of the program doesn’t have to constantly occur.

The Key to Own Program works with other home buyer programs, including the MSHDA first time home buyer down payment / closing cost assistance.  In this program buyers are provided up to $10,000 depending on their situation and location towards purchasing a home.  The assistance becomes a “soft second” mortgage.  There is no interest accrued or monthly payments and is only due back if / when the house is sold, is no longer a primary residence, is refinanced, or paid off.

Other States Section 8 Home Buying Programs:

Similar programs in other states also show very low numbers of participants who purchase homes through the Section 8 program. All states programs must meet certain federal HUD requirements.  In the Louisville Metro area they administrate 11,000 vouchers and average 25 closings per year.  They have had around 400 closings over the last 20 years. In Columbus OH where they have 13,500 vouchers they have 11 to 14 closings per year and have had 290 total since inception.  In Fort Worth Texas they manage 6,000 vouchers and have had 286 closings since 2004, averaging 13 per year.

This program is also highly important because in many areas very few landlords will accept Section 8 payments.  Sometimes this is because the payments are below market rate for that particular house, sometimes it is due to the administrative burden of dealing with Section 8, and sometimes it is due to the perception of Section 8 tenants being seen as worse tenants than someone paying the entirety of their rent. I personally have not used section 8 as a landlord for the first 2 reasons.  I would say about 95% of listings state Section 8 is not accepted.  Since fewer landlords accept Section 8, this program allows people already in Section 8 rentals to move out into their own homes and frees up those rentals for other voucher holders.  It is not uncommon for people with a Section 8 voucher that will pay 100% of their rent to not be able to find anyone to rent to them.

Michigan Section 8 Key To Own Program Requirements:

In order to qualify, a section 8 tenant must meet the following requirements:

• Minimum Credit Score of 640
• Minimum Bank Balance of $1,300 for 2 months
• Good Standing In The Section 8 Program
• Take free home buyer and personal finance classes
• Have A minimum income of $15,000
• Work a minimum of 30 hours per week
• Become debt free
• Limit of Assistance: 10 years if mortgage is <20 years and 15 years otherwise.
• Yearly home inspection and recertification of income eligibility.
• The tenant must come up with a 3% down payment, with 1% coming from their own resources.

The limit to assistance adds an interesting dynamic to the system. Here’s how it would work in practice:

Example: $100,000 home at 7% interest for a 15 year, 20 year, and 30 year loan:

The 15 year mortgage only receives benefits for 10 years. At the end of that 10 years a total of $55,242 would have been paid down on the loan. The buyer would have 5 more years of needing to pay $899 per month.

The 20 year mortgage would receive benefits for 15 years. At the end of 15 years $61,393 would have been paid down on the loan.  The buyer would have 5 more years of paying $775 a month.

The 30 year mortgage would receive benefits for 15 years.  At the end of 15 years $26,215 would be paid down on the mortgage.  The buyer would need to pay $665 a month for another 15 years.

It is by far best to purchase a house with a 20 year mortgage through the section 8 program.  A 20 year mortgage and a 30 year mortgage both have a 15 year limit of benefits while the 15 year mortgage only has a 10 year limit of benefits.  A 20 year mortgage will have significantly more principal paid down by Section 8 over 15 years than a 30 year mortgage will and the buyer will only have 5 years left instead of 15.

The best option would be to make additional payments on the 20 year loan while receiving benefits. For a $100,000 home, paying an extra $125 per month or $1,500 each year at tax time would pay the house off at the 15 year mark, and the buyer would never have to pay a full house payment.

How The Assistance Payment Works:

For a Section 8 tenant, the program will send a direct deposit monthly directly to the landlord.  In the case of the ownership program, Section 8 sends a housing assistance payment (HAP) either directly to the mortgage company OR directly to the tenant.  This HAP will vary each year based on the income of the participant.  If income goes down, this payment will increase and if income goes up it will decrease.

There are 3 separate models that can be used for how the payment is applied to a loan:

Option 1: Single Mortgage: HAP as income:  The lender uses the HAP payment as a source of income. Because this amount can only be used as housing, the lender can credit it as 25% larger than normal income.  So a buyer who has $2,000 of monthly income and a $700 HAP will get a HAP credit of $875, for total qualifying income of $2,835. Using a 36% DTI this method would qualify for a total housing payment of $1,020 a month.

Option 2:  Single Mortgage: HAP as additional mortgage payment: Using this method the HAP is added directly to the mortgage payment amount the buyer can have.  A buyer with an income of $2,000 a month would qualify for a $720 monthly mortgage payment.  Adding in the $700 as an additional mortgage payment allows the buyer to qualify for a total housing payment of up to $1,420.

Option 3: Double Mortgage: HAP as a 2nd mortgage:  In this scenario the buyer qualifies for a mortgage based on their income, sticking with our example, this can be up to $720 a month.  A 2nd mortgage is created that can be up to $700 a month that is paid directly by the HAP.  Total housing payment qualification of $1,420 a month.

What option is best?  

It depends on the scenario. In general, option 3 is more complicated and serves little benefit for that extra complication of having 2 separate loans.  Option 3 is best for someone who lives in an area where house prices are high.  It may be that without using this model there simply are ZERO homes available for sale for the price range of the buyer otherwise.  Option 2 is best for someone in a low cost of living area, like Benton Harbor, MI.   This limits the total payment down so that more of the total housing cost is covered by the Section 8 program.

What Buying A House Through Section 8 Could Look Like:

Katie is a mom of 2 kids on Section 8 living in Benton Harbor, MI.  She works 30 hours a week earning $16 per hour.  Her yearly income is $24,000.  She has a voucher for $700 per month.  She has a 580 credit score and $1,200 in debt across 3 bad bills.  Katie expects to receive a tax refund of around $7,000 in March.  She wants to maximize the value of her Section 8 voucher through the home ownership program.

Step 1:  Katie ensures she pays her portion (if any) of rent and keeps the home in good order to stay in good standing.

Step 2:  Katie calls up her debtors off of her credit report and offers them 25 cents on the dollar to mark as “paid in full” and remove from her credit report.  She pays a total of $300 and all of her bad accounts are gone. She then buys tradeline access, where she pays to be added as an authorized user on someone else’s credit card account that is in good standing.  This gives her several years of credit history and positive credit utilization.  She pays $300 and gets added to a card with a $4,000 limit that has been in great standing for 5 years.   Over the next 6 months her score will rise to above 640.

Step 3: Katie takes the free home buyer and personal finance classes.  She learns that with her income alone of $24,000 per year she can have a mortgage payment of $720.  Assuming $120 for taxes and insurance, her Principal and Interest payment can be $600 a month.  For a 30 year mortgage at 7% this is a house of around $90,000, for a 20 year at 7% its around $77,000 and for a 15 year mortgage at 6.5%  is a house around $67,000. She has a Housing Assistance Payment of $700 per month, which could allow her to get a mortgage payment of $1,300. For a 30 year, 20 year and 15 year mortgage these would be home values of  $195,000 , $168,000, and $145,000.

Katie decides that she wants a 20 year mortgage to own her home sooner and also wants to buy a lower value house so that more of her total housing expense is covered by the HAP.  She decides to look for a home that is around $100,000.  This will ensure that if for whatever reason she stops receiving the HAP benefit, she can still afford the home.

Step 4:  Katie receives her tax refund in March and spends $2,000 of it, keeping $5,000 in cash.

Pre-approval: In May Katie validates she has met all criteria with her Section 8 coordinator and goes to talk to a mortgage broker in the Key To Own program.

Step 5:  House shopping: Katie finds a house like this one priced at $100,000.  She makes an offer and it is accepted.  She puts down 3%, which is $3,000.  Her new house payment is $737 per month, not counting taxes and insurance, which will add another $100 a month to her costs for a total housing cost of $837 a month.  She uses the HAP to pay $700 of the $837 monthly payment.  She pays $137 as her required payment.  This is relatively easy for her income level.  She then decides to pay an additional $125 per month so that the house is paid off when her benefit will end in 15 years.

Step 6: *Fast forward 15 years.  Katie has lived in her own home for 15 years, her children have grown up in this home.  Her housing assistance is ending, but so is her mortgage because she made those small extra payments.  Katie now only has to pay property taxes and insurance.

Most people would not make the decisions Katie made.

First of all, MOST people will not apply for the program.  They will stay as Section 8 renters forever. Most of the thought processes here are on the short term.  If the furnace goes out its the landlords problem to fix it. If there is a roof leak it’s the landlord’s problem.   But what if the landlord decides to sell their home and the new owner doesn’t want to rent it out?  There are risks to being an owner and risks to being a tenant.  I personally will take the owner risks any day.

Of the select few who do go through this program and are able to buy a house, I would bet 90% of them will max out the loan they can get to buy the nicest house possible.  They will also get a 30 year loan.

How will this look instead?

With $1,300 being the total allowed payment (excluding $120 a month for taxes and insurance), a 30 year mortgage at 7% would allow for someone in Katie’s position to purchase a home costing $195,000.  Her monthly payment would be $1,420 including taxes and insurance.  Katie would struggle to pay the $720 a month that is her portion, while receiving the $700 in HAP.

At the end of 15 years, Katie would still need to pay $1,420 a month for the next 15 years and still owe $107,000 on the house.  This sets her up for a major shock when she now has to come up with an extra $700 each month to keep her home.  Not a good scenario. It MAY be easier for Katie to make the payments in 15 years as her kids may be grown, she may be earning more money, and inflation may have reduced the value of the debt and the monthly payment.

The Opportunity For Sellers:

When I watched the webinar for program administrators the main problem identified by program administrators was high competition / lack of housing stock.  Further into the conversation it becomes clear that the process is cumbersome and can seriously reduce the likelihood that a Section 8 buyer going through this program would win the house in a competitive bid situation.

Most sellers fall into 1 of 3 categories: Banks selling foreclosures, home owners selling their residence, and investors selling properties they no longer want / getting out of the game.  The first 2 groups value having certainty and timeliness in a closing. The third group generally values this as well.  These benefits exist to virtually all offers, except for people in this program.

A pre-approved Section 8 buyer has to have the housing authority inspect the home PRIOR to putting in an offer.  Then the offer requires a home inspection.  The offer only has $500 of earnest money, and the buyer is putting down 1% to 3.5% for an FHA mortgage.

This adds a lot of uncertainty and delays.  How long does it take the housing authority to inspect the house?  Then how long after the inspection to allow an offer?  Many houses are listed and have an accepted offer in just a couple days.  My son recently bought his first home. It was listed on a Friday night and all offers had to be in by Noon on Sunday.

Think about this scenario: 

Livable 3/1 home listed for $80,000. It receives these offers:

• $65,000 cash offer, $5,000 Earnest money 10 day closing. This offer is from an investor who has purchased 10 houses in the last 2 years.
• $80,000 conventional mortgage offer, $2,000 Earnest money, no inspections. This offer is from someone who recently sold their home elsewhere and is moving to the area.
• Intention to make an offer: $90,000 Section 8 FHA mortgage, $500 Earnest money, inspection clause.  Pending ability to make an offer until housing authority inspection occurs.

I would guess that 75% of sellers would go with the $80,000 offer.  24.9% would go with the cash offer, and only 0.1% would select the section 8 buyer.  Here’s where the opportunity lies:

This program 100% rewards people who are willing to wait a couple weeks and put up with some more red tape to close.  For banks, they need to get the house off their books, for home owners they need to move on to the next house, but for an investor like me, this presents an opportunity to get a premium offer.

On the lower end of housing, the Section 8 buyer is in a really strong position.  In the example I gave above, that buyer can pay a lot more for a house because they have the Section 8 benefit and it’s not their money.  The program administrators also talked about in the event that something doesn’t pass inspection on the house, asking the seller to fix it, and then upping the purchase price to effectively pay for it.

What difference does an extra $5,000 or $10,000 on the home price make to Katie?  She’s approved for well over $100,000.  On a 20 year 6.5% mortgage her P+I would be $596 for an $80,000 home.  Increasing it to $90,000 increases her P+I payment to $671.   With taxes and insurance $100 either way, these payments are $696 and $771 respectively.  Her housing assistance is $700 a month.  She is looking at paying $0 a month out of pocket or $71 a month out of pocket.  That difference doesn’t matter to her.  As long as the house can appraise for $90,000, she would be able to purchase the house.

As an investor who owns 10 houses and may start “slow flipping” some of them, to me earning an extra $10,000 off of a house is well worth the red tape and a couple weeks.

A step further: Before even listing a house for sale, contact the public housing authority to see if they have a section 8 buyer in your area who is pre-approved for a loan.  Then deal directly with them.  Cut out the Realtors and potentially make even more profit.

Conclusion:

The Section 8 home buying program is in my opinion a much better way to provide housing assistance than the rental model.  The rental model does not end.  The rental model helps a tenant for this month, but build no equity or long term security.  With the rental model the majority of the benefits go to the landlords.

The home buying model encourages wealth building and a good chunk of the payment can depending on the loan term go towards the principal balance for direct wealth building.  Home ownership is learned through the classes and through practice.  The children of this Section 8 recipient will see owning as normal and want to own in the future, instead of wanting to rent.  They will know it is achievable from them to be owners.

For the state, it is a much better use of funds.  The benefits eventually end, unlike with the rental model.  The program is helping people who have virtually no net worth get traction and build equity.

Are there factors that could be improved? Absolutely.  If I were in charge I would want to make it mandatory for all housing authorities to use the program.  The goal would be to have every eligible tenant go through this program and to actively encourage each Section 8 renter to become a home owner.

I would have an advertising section for home sellers to work directly through Section 8 as a mass buyer of homes so that Section 8 tenants would have exclusive ability to make offers on homes.  For example, a home seller submits their house to an online portal with the address, pictures, and list price.  A Section 8 inspector comes out right away to approve the home.  Then eligible Section 8 Key To Own participants can make offers on the home.  If the home doesn’t have an accepted offer inside of 14 days with completed inspections, then the seller if free to exit the Section 8 exclusivity and list on the open market.  The advantages being sold to the seller are: less hassle, streamlined process, exclusive buyers competing with each other, and potentially no Realtor commissions.

I would also provide a more in depth class on credit repair in order to help more people qualify for the program.  I think credit scores tend to be a major barrier for people, and often times the problems can be solved relatively quickly with low cost.  I’ve seen tenant applicants with credit scores in the 400s who have multiple unpaid bills that only total a few hundred dollars.  These could be paid off and removed from their credit reports for 25 cents on the dollar.  Then using trade lines for a few hundred bucks they can essentially buy positive past credit history.

What do you think of the Section 8 Home Ownership Program?  What changes would you make?