Everything You Need to Know About Section 8 Home Loans

Section 8 home loans can be an excellent option for low-income families looking to purchase their first home. The Section 8 Housing Choice Voucher homeownership program allows voucher holders to use their rental assistance towards a mortgage payment. With some planning and preparation, Section 8 voucher holders may be able to transition from renting to owning their own home.

What is the Section 8 Homeownership Program?

The Section 8 Housing Choice Voucher (HCV) homeownership program is administered by local Public Housing Authorities (PHAs). It allows current voucher recipients to utilize their rental assistance to cover the costs of homeownership Specifically, the monthly assistance that would normally go towards rent can be used for mortgage payments, property taxes, homeowner’s insurance, and other eligible homeownership expenses

The Section 8 homeownership program aims to help low-income, first-time homebuyers transition out of renting It is only available to current voucher holders who meet work and income requirements Participants must also complete housing counseling prior to purchasing a home.

Who is Eligible for Section 8 Home Loans?

To qualify for the Section 8 homeownership program, applicants must:

• Have a Housing Choice Voucher for at least 12 months
• Meet minimum income requirements set by the local PHA
• Have full-time employment (elderly and disabled persons exempted)
• Attend and complete housing counseling
• Have at least a minimal down payment (often 1% of purchase price)
• Have a satisfactory credit history
• Meet other criteria as determined by the PHA

The program is intended for first-time homeowners who are ready for the responsibilities of owning a home. Interested voucher holders should contact their local PHA for information on specific eligibility and requirements.

How Does the Section 8 Homeownership Program Work?

Current voucher recipients who are interested in buying a home must first apply and be approved for their PHA’s Section 8 homeownership program. Here are the general steps:

1. Attend Housing Counseling: HUD requires all applicants receive housing counseling from a HUD-approved agency prior to purchasing a home. Counseling covers topics like budgeting, credit, financing, and home maintenance.

2. Find a Home and Get Mortgage Pre-Approval: Participants search for a qualifying home and apply for mortgage pre-approval through a lender. The home must pass inspection by the PHA.

3. Use Voucher for Mortgage Payment: At closing, the voucher can be used to cover a portion of the monthly mortgage payment including principal, interest, taxes, and insurance (PITI).

4. Pay Out-of-Pocket Expenses: The voucher holder must pay for any expenses not covered by the monthly assistance payment, such as the down payment and closing costs.

5. Comply with Program Rules: Homeowners must adhere to the program terms, like occupying the home as their primary residence, for as long as they wish to receive the voucher assistance.

How Much Financial Assistance is Provided?

The amount of monthly assistance provided depends on several factors:

• Income: Households with higher incomes receive smaller subsidies.

• Home Price: There are caps on the maximum home value allowed.

• Mortgage Payment: The voucher covers the difference between 30% of monthly income and the total PITI payment.

• Minimum Family Contribution: Families must pay a minimum out-of-pocket contribution that increases over time.

In general, the subsidy amount decreases over time as the required family contribution increases. The assistance has a limited term of 10-15 years based on the mortgage length.

What Are the Home Eligibility Requirements?

For a home purchase to be approved, the property must meet certain criteria:

• It must pass Housing Quality Standards inspection by the PHA.

• The purchase price cannot exceed the maximum set by the local PHA.

• It must be the family’s primary residence.

• It can be a single family home, condo, cooperative, or manufactured home.

In addition, families are generally prohibited from buying homes:

• Owned by relatives
• Where the family holds an ownership stake
• Involved in financing tied to the seller

The PHA will examine the financing, inspection reports, purchase agreements and other documents to ensure program compliance.

What Costs Do Families Pay Out-of-Pocket?

While the monthly mortgage payment is subsidized, participants must pay many upfront and ongoing costs on their own:

• Downpayment (min. 1% of purchase price)
• Closing costs and fees
• Any amounts above the payment standard/voucher maximum
• Private mortgage insurance
• Homeowner association or condo fees
• Maintenance and repairs
• Utilities, if not included in PITI
• Any increase in PITI after the voucher term ends

Families should be prepared for these additional expenses when budgeting to buy a home. Ongoing costs like maintenance can add up quickly.

What Are the Pros and Cons of Section 8 Homeownership?

There are many benefits but also drawbacks to consider when determining if the Section 8 homeowner program is right for you:

Pros

• Builds equity and long-term wealth
• Housing payment is consistent and predictable
• Opportunity to customize and upgrade home
• Potential for appreciation over time
  -chance to stabilize housing and stay long term

Cons

• Upfront and ongoing costs beyond subsidy
• Expenses for maintenance, repairs and emergencies
• Loss of flexibility to relocate easily
• Potential difficulties selling home when market is down
• Assistance has limited term

For many, the potential rewards outweigh the risks. But interested participants should consider both when deciding.

Are There Programs to Assist with Down Payment and Closing Costs?

The Section 8 voucher does not cover any upfront homebuying expenses. Fortunately there are many other programs that provide down payment or closing cost assistance:

• State/local down payment programs – Many areas offer grants, low interest loans and tax credits to assist first-time homebuyers.

• Mortgage company assistance – Some lenders provide grants or subsidized interest rates.

• 401(k) or IRA withdrawals – First-time buyers can withdraw retirement savings penalty-free for home purchase.

• Seller contributions – Sellers may agree to pay some closing costs or “buy down” interest rate.

• Gifts from family – Relatives often gift money to cover downpayment and closing costs.

Be sure to exhaust all possible options to limit out-of-pocket costs when buying a Section 8 home. Shopping around for the best mortgage rate and terms can also help reduce expenses.

How Do I Apply for the Section 8 Homeownership Program?

The Section 8 homeownership program is administered at the local level by individual Public Housing Authorities (PHAs). To apply, you must contact the PHA that issued your Housing Choice Voucher.

The PHA will provide information on their specific program requirements and application process. There may be waitlists, so it helps to apply as soon as you are interested and eligible.

Some PHAs may not operate homeownership programs or may have long waitlists. However, the voucher is “portable” to another area if you are willing to relocate.

Can I Convert My Voucher Back to Rental Assistance?

In certain situations, such as financial hardship, homeowners may be able to convert the homeownership voucher back to rental assistance:

• If mortgage is foreclosed, the PHA may issue a rental voucher.

• The PHA may allow voluntary surrenders of the home and return to rental voucher.

• Elderly or disabled homeowners may revert to rental assistance for health/safety reasons.

• If a home inspection is failed, the family cannot pay for repairs, and no extensions are granted, the homeownership assistance ends.

Participants should notify their PHA as soon possible if they can no longer afford their home. There are protections in place to prevent families from becoming homeless if homeownership does not work out.

Is The Section 8 Homeownership Program a Good Fit?

The Section 8 homeownership program offers qualifying families a chance to achieve the dream of homeownership. With proper preparation and a willingness to take on the risks and responsibilities of owning a home, it can provide long-term housing stability and a way to build financial security.

Interested voucher holders should carefully consider their financial readiness, know the program rules and limitations, and weigh the pros and cons before making the leap from renting to owning. While challenging, Section 8 homeownership presents a life-changing opportunity for those able to make it work.