National Housing Law Project Section 8 Housing

HUD ISSUES FINAL RULE IMPLEMENTING THE SECTION 8 HOMEOWNERSHIP PROGRAM

Introduction

On September 12, 2000, the Department of Housing and Urban Development (HUD) issued its final rule to permit the use of Section 8 voucher assistance for homeownership purposes. Under the new regulation, public housing authorities (PHAs) may decide to allow Section 8 voucher holders to use federal assistance to purchase a single family home, manufactured home, condominium or interest in a cooperative. Since HUD will not provide any additional funding for this program, PHAs are not required to offer this assistance to voucher holders. In certain "hot" rental markets, however, the Section 8 Homeownership Program may provide some relief for tenants who can no longer afford high rents but can still afford a mortgage payment. For areas faced with an increasing lack of landlord participation in the Section 8 program (and therefore a growing lack of rental units), homeownership programs can also create a larger selection of housing units from which Section 8 recipients can choose. Undeniably, the program further offers lower-income families with an opportunity, on a voluntary level, to achieve their homeownership dream.

Although HUD regulations set forth mandatory requirements for PHAs implementing a Section 8 homeownership program, HUD also affords PHAs a large amount of discretion to design its own program to meet local needs. The final HUD regulations pose many issues and conflicts affecting poor families which are caused, in part, by HUD's effort to transfer substantial control to local jurisdictions to develop their own programs. Thus, it is imperative that the lower-income community and its advocates ensure that the needs and rights of potential Section 8 homeowners are considered and preserved. In fact, since the adoption of a homeownership program involves amending both the PHA Annual Plan and the Administrative Plan, advocates have substantial opportunities to become involved in both the development and implementation of local Section 8 homeownership programs.

This article discusses the final regulations and what is required by PHAs, Section 8 voucher holders and homeowners using Section 8 assistance. It describes the mandatory, statutory and regulatory requirements that PHAs must adopt within its Homeownership Program and further provides an overview of other elements the PHA must consider. A future article will examine the problematic features of the homeownership program as well as provide details of how to design a successful Section 8 Homeownership Program.

Statutory and Regulatory Framework

With the enactment of the Quality Housing and Work Responsibility Act of 1998 (QHWRA)¹, Congress aspired to promote affordable housing for low-income families by, among other things, providing more flexibility to PHAs and creating incentives to, and economic opportunities for, federally-assisted tenants who work and become self-sufficient.² In keeping with this goal, Congress created a Homeownership Option for families receiving Section 8 tenant-based assistance.³ On September 12, 2000, HUD issued its final rule implementing the Section 8 Homeownership Program, allowing PHAs to permit Section 8 recipients to convert their voucher rental assistance to homeownership assistance in order to purchase a home.⁴ The final rule is effective October 12, 2000. 

HUD published its proposed Section 8 Homeownership Program rule for public comment on April 30, 1999.⁵ Although the final rule adopts much of the proposed rule, there were significant changes made to the final regulations in response to public comment.⁶ As discussed below, the final rule extends the maximum term of homeownership assistance, adds more housing types that can be purchased with homeownership assistance, and increases the eligible household members who may meet the mandatory income and work requirements. The new regulations also require the PHA to recapture a percentage of the homeownership assistance if the home is sold or the mortgage refinanced during the first 10 years of ownership.

The regulations include several mandatory, non-discretionary program elements that must be incorporated into a local homeownership program if such a program is adopted by the PHA. In addition, HUD grants the PHA substantial discretion in developing its own program requirements and in determining eligibility requirements of participating families. Accordingly, it is imperative that Section 8 recipients, tenant associations and housing advocates participate on a local level in the drafting and implementation of the Section 8 Homeownership Program as well as the required policy changes to the Administrative and Annual Plans.

Implementing the Section 8 Homeownership Program

It is solely the decision of the PHA to allow Section 8 voucher recipients to use their federal assistance for homeownership. Financially, there is little incentive for the PHA to adopt a homeownership program. HUD does not designate or provide any additional Section 8 administrative funding for homeownership vouchers. Rather, the PHA must use its tenant-based program funding received under the annual contributions contract between the PHA and HUD to fund any homeownership program.⁷ Furthermore, the PHA is not allowed to set aside Section 8 program funding or create special waiting list positions for homeownership vouchers. As a result, HUD provides no inherent incentives for PHAs to adopt a Section 8 Homeownership Program. Accordingly, homeownership programs will most likely be implemented by PHAs which understand, because of demonstrated need and strong advocacy efforts by tenants and their representatives, that a voluntary homeownership option is in the best interest of Section 8 tenants. 

To implement the program, the PHA must include a statement of the homeownership program it administers, or intends to administer, in its Annual Plan.⁸ The governing body of the PHA must conduct a public hearing, with appropriate notice and publication, prior to adoption of the Annual Plan.⁹ Some PHAs have already stated such intentions to develop a homeownership program (by checking the applicable box in the PHA annual plan.).¹⁰ If not, the PHA may amend or modify its Annual Plan at any time by adopting the amendment or modification at an open public meeting of its governing body and by obtaining HUD approval prior to implementation.¹¹

If the PHA elects to provide a homeownership program, the PHA must demonstrate in its Annual Plan its capacity to operate a successful program. The PHA can demonstrate this capacity by any of the following methods:

• requiring each family to pay a minimum downpayment of at least 3 percent of the purchase price and further requiring that at least 1 percent of such purchase price comes from the family's personal resources; ¹² or
• requiring that the financing for the home purchase is provided, insured or guaranteed by the state or federal government (including FHA insurance), complies with secondary mortgage market underwriting requirements, or complies with generally accepted private sector underwriting standards; or
• otherwise demonstrating in its Annual Plan that it has the capacity, or will acquire the capacity, to successfully operate a Section 8 homeownership program.¹³

In addition to mandatory requirements imposed by Congress and HUD, the regulations permit the PHA to adopt any additional policies it desires to implement its program and to meet local community needs. Discretionary policies adopted by the PHA must be incorporated into the PHA's administrative plan. 

Such policies include:

• the maximum term the family is provided to locate and purchase a home;¹⁷
• any purchasing (including downpayment), financing and mortgage payment requirements;¹⁸
• whether the family will be provided Section 8 rental assistance (or placed on the waiting list) if the purchase is not completed or if the family defaults on its mortgage;¹⁹ and 
• the events that will trigger the PHA to prohibit the family to move to another home or to discontinue rental or homeownership assistance.²⁰

To participate in the homeownership program, families must be eligible under HUD regulations as well as meet any discretionary requirements the PHA may elect to adopt in its local program. To determine initial eligibility, the family must be either an existing recipient of the Section 8 Housing Choice voucher²¹ or be newly admitted to the program.²² The family must also qualify as a first-time homebuyer.²³ HUD revised the proposed regulations to expand the definition of first-time homebuyer to include:

• single parents and displaced homemakers who owned a home, or resided in a home owned by his or her spouse, while married;
• families which own cooperative membership shares; 
• families in which no family member has had an ownership interest in another residence during the three years prior to the commencement of the homeownership assistance;
• families of which a family member is a person with disabilities if homeownership assistance is needed as a reasonable accommodation.²⁴

Moreover, and with the exception of cooperative members, no family member may have a present ownership interest in a residence upon commencement of homeownership assistance (or obtain any ownership interest in a second residential property while receiving homeownership assistance).²⁵ The family is not permitted to receive homeownership assistance if it previously received such assistance and defaulted on the mortgage to purchase a home.²⁶ The family must agree to attend and complete a pre-assistance and housing counseling program administered by the PHA or its designee.²⁷ The PHA may also compel post-purchase counseling as a requirement for receiving continued homeowners assistance.²⁸ Finally, the family must satisfy both the "minimum income requirement" and the "employment requirements" discussed below to participate in a homeownership program. 

The Minimum Income Requirement

Pursuant to statutory law, a family must demonstrate a minimum gross monthly income that is equal to or more than twice the payment standard established by the PHA, or any other amount that may be established by the HUD Secretary.²⁹ After consideration of public comments, HUD established a national minimum income requirement equal to 2,000 hours of annual full-time work at the federal minimum wage.³⁰ The PHA is not authorized to establish any other minimum income requirement. Moreover, in assessing whether the family's gross annual income meets the national minimum income requirement, the PHA must consider the income of all adult family members who will own the home upon initial receipt of homeownership assistance. The PHA must include welfare assistance in determining the annual income of disabled or elderly families; however, it may not consider welfare assistance received in determining the annual income of a non-disabled or non-elderly family's annual income. On the other hand, welfare assistance must be considered by the PHA to determine whether the family is eligible for admission to the voucher program and to calculate the amount of the family contribution (the total tenant payment) or the homeownership assistance payment.³¹ Finally, the minimum income requirement is only considered in determining a family's initial qualification to purchase a home with Section 8 homeownership assistance; it is not a continuing requirement and not considered again unless the family opts to purchase a subsequent home with homeownership assistance.³²

The Family Employment Requirement

The QHWRA also gives HUD the authority to establish a "family employment requirement," mandating that the family achieve a certain period of employment before receiving homeownership assistance.³³ Final regulations require the family to demonstrate that one or more adult family members who own the home upon commencement of receiving homeownership assistance meet two requirements: (1) at least one adult family member is currently employed on a full-time basis (meaning not less than an average of 30 hours per week); and (2) at least one adult family member has been continuously employed full-time (as previously defined) for the year before receiving homeownership assistance.³⁴ Although the PHA is prohibited from establishing an employment requirement in addition to the federal standard, it is given discretion to determine whether self-employment in a business, or successive employment during the previous one year period, satisfies the statutory requirement. In addition, the PHA may consider an interruption in employment, and the circumstances involved, to determine whether the family meets the employment requirement.

The employment requirement does not apply to elderly or disabled families. Furthermore, if a member of a family is a person with disability, the PHA must grant an exemption from the employment requirement if the exemption is needed as a reasonable accommodation.³⁵

Finding the Appropriate Unit

In addition to family eligibility, HUD requires that the PHA determine and require the following before a family can participate in the program:

• that the unit to be purchased is the only unit on the property or is a condominium or cooperative, and is not defined as ineligible by HUD;³⁶
• that the unit to be purchased must be inspected, and pass, an initial Housing Quality Standards set forth by HUD;³⁷
• that the unit must be inspected by an independent inspector. The third-party inspector must be designated, and paid for, by the family. The inspector must provide a copy of the inspection result to both the family and the PHA;.³⁸ and 
• that the family cannot purchase a house if the PHA is informed (by HUD or other sources) that the seller is debarred, suspended or subject to a limited denial of participation.³⁹

Prior to purchasing a home, the family must enter into a contract of sale with specific provisions set forth by regulation. These provisions include an agreement for the pre-purchase inspections described above and provide that the buyer is not obligated to pay for repairs or purchase the home unless the pre-purchase inspections are satisfactory.⁴³ The contract of sale must also provide a certification from the seller stating the seller has not been debarred, suspended or subject to a limited denial of participation by HUD.⁴⁴

Financing Requirements

Although the proposed rule required that homes purchased by the family without FHA mortgage insurance must comply with the basic underwriting requirements for FHA-insured single family homes, this requirement was removed from the final rule. However, if the homeowner elects to use financing with FHA mortgage insurance (or if the PHA requires FHA insured financing), the loan is subject to FHA mortgage insurance requirements.⁴⁵ In addition, the PHA may establish its own financing requirements (such as lender qualification or financing terms) and institute other requirements or restrictions regarding the debt securing the home. Any such requirements, however, must be set forth in the PHA's Administrative Plan.⁴⁶

Additional Terms of the Homeownership Assistance

Time Limitations

The family may only receive homeownership assistance for a designated period of time. If the family qualifies as an elderly or disabled family upon commencement of homeownership assistance, there is no time limit for the family to receive homeownership assistance.⁴⁷ In all other cases, however, the family may only receive assistance for ten years — unless the initial purchase mortgage has a term of 20 years or longer which increases the family's maximum term for assistance to 15 years.⁴⁸ For families who sell and purchase another home with continued homeownership assistance, the maximum term commences upon the date of the purchase of the first home. The homeownership assistance will terminate automatically 180 calendar days after the last housing assistance payment is made.⁴⁹ The PHA, however, has the discretion to grant relief from termination if it determines that automatic termination would result in extreme hardship for the family.⁵⁰

Ability to Move/Portability

Provided that the family remains eligible under the terms of the program and the PHA has sufficient funding to continue homeownership assistance, the family is permitted to move and purchase a new home with its Section 8 assistance.⁵¹ Furthermore, the family may move outside the initial PHA jurisdiction, provided that the receiving PHA is administering a Section 8 homeownership program, is accepting new homeownership families, and the family and the unit meet the eligibility requirements.⁵²

Recapture Requirements

Under the new regulations, the PHA is required to "recapture" a percentage of the homeownership assistance that was provided to the family when the family either sells or refinances the home.⁵³ The percentage of recaptured amounts will decrease in annual increments of 10 percent over a 10-year period. Thus, at the end of the 10-year period, the amount of homeowners assistance that is subject to recapture will be zero.

The amount to be recaptured upon sale of the property is calculated on several factors, including the amount of assistance provided to the family, the difference between the purchase and sales price of the home and the amount of capital expenditures, closing costs and real estate commissions. The PHA is not permitted to recapture more than the amount of homeownership assistance that was actually provided to the family nor more than the appreciated value of the home. In addition, proceeds of the sale that are used to purchase a new home with continued Section 8 homeownership assistance are not subject to recapture. Likewise, only cash taken out of a refinance is subject to recapture by the PHA. The PHA is required to secure its right to recapture the homeownership assistance by securing a lien on the property that is subordinate to the purchase or refinance mortgage. 

Termination of Assistance

The HUD regulations provide for termination of homeownership assistance (and denial of voucher rental assistance) if the family fails to comply with its family obligations as set forth in § 982.551 et seq.⁵⁴ In addition, HUD requires the PHA to terminate homeownership assistance for any family that is "dispossessed" from the home pursuant to judgment or foreclosure order.⁵⁵ The PHA, however, may consider mitigating circumstances in determining whether to provide a family with voucher rental assistance after a mortgage default.⁵⁶

Conclusion

For the first time, low-income families receiving Section 8 voucher assistance have a chance for successful homeownership through the Section 8 Homeownership Program. At the same time, however, severe consequences may result for families who attempt to utilize the program and fail (either because of mortgage foreclosure or because they cannot locate a house to purchase within the time frame imposed by the PHA.) Most drastically, if the family fails to successfully become or remain homeowners, PHAs have the authority to revoke or deny the family's Section 8 tenant-based assistance or to place the family back on the waiting list. Thus, the family may lose all access to Section 8 assistance.

Accordingly, and despite the opportunities provided by the Section 8 Homeownership Program, advocates must give careful consideration to the programmatic requirements imposed by the PHA and its governing body when drafting and adopting a homeownership plan. In addition, PHAs and advocates must ensure that all necessary participants — and all necessary safety nets — are in place to ensure that the Section 8 program is successful. These topics will be more fully discussed in a future Bulletin article.

¹Public Law 105-276, Title V, § 501 et seq., 112 Stat. 2518 (approved Oct. 21, 1998). The QHWRA amended the United States Housing Act of 1937 (42 U.S.C.A.1437 et seq.).

²Id., Title V, § 502(b), 112 Stat. 2520 (Findings and Purposes).

³The homeownership option is authorized under § 8(y) of the United States Housing Act of 1937, 42 U.S.C.A. 1437f(y)(1)(B), as amended by § 555 of the QHWRA.

⁴24 C.F.R. Parts 5, 903 and 982; 65 Fed. Reg. 55,134 (Sept.12, 2000).

⁵ 64 Fed. Reg. 23,488 (Apr. 30, 1999).

⁶65 Fed. Reg. at 55,143. 

⁷Id.

⁸See generally 24 C.F.R. § 903.7(k). PHAs permitted to submit "streamlined" Annual Plans (i.e. high performing PHAs, "untroubled" PHAs with less than 250 public housing units and PHAs that only administer tenant-based assistance and do not operate or own public housing) are only required to include a statement of any homeownership program it administers under § 8(y) of the Housing Act in its streamlined plan. 24 C.F.R. §§903.11(b) and (c)(1). However, information must be provided in all streamlined plans regarding how the public may reasonably obtain policies contained in the standard Annual Plan that are excluded from the streamlined submissions to HUD. Id.

⁹24 C.F.R. §§ 903.17(a) and (b).

¹⁰The first Annual Plan must be submitted to HUD 75 days in advance of the PHA fiscal year in which it receives federal fiscal year 2000 funds and continues annually thereafter. 24 C.F.R.§ 903.3(b); see also HUD Notice PIH 2000-43 (HA) (Sept. 18, 2000) (extending Notices PIH 99-33 (HA) and PIH 99-51 (HA).

¹¹24 C.F.R. § 903.21.

¹²30 HOUS. L. BULL. 119 (Aug.2000) erroneously states that the final regulations establish a minimum downpayment requirement. Please note, however, that a mandatory downpayment option is optional and is not required to be implemented by the PHA. 

¹³24 C.F.R. § 982.625(d). For example, the PHA may decide to partner or contract with existing experienced nonprofit organizations for consultation, implementation or administration of the homeownership program. See HUD response to Comments Regarding the Role of Non-Profits, 65 Fed. Reg. at 55,145.

¹⁴§ 982.626(b).

¹⁵§ 982.635(c). The regulation sets forth permissible amounts that may be covered as homeownership expenses, including mortgage debt, taxes and assessments, and repair and maintenance, for both homeowners and for owners of cooperative and condominium units. In addition, the final rule clarifies that, if the PHA determines that such an allowance is needed as a reasonable accommodation, eligible homeownership expenses may include the cost for financing to make a home accessible for a member of the family who has a disability. 24 C.F.R. § 982.635(c)(2)(vii) and (c)(3)(vii). 

¹⁶§ 982.635(d).

¹⁷§ 982.629(a).

¹⁸§ 982.632. The jurisdiction is permitted to use local or state Community Development Block Grant (CDBG) funds or other subsidized financing in conjunction with the Section 8 homeownership program. See Overview of the Section 8 Homeownership Program, 65 Fed. Reg. at 55,135.

¹⁹§§ 982.629(c) and 982.638(d).

²⁰§§ 982.637(a), (c) and (d). Although the family receiving homeownership assistance is generally permitted to move and receive continued rental or homeownership assistance in accordance with voucher program requirements, the PHA may prohibit more than one move by the family during any one year period. § 982.637(a)(3). 

²¹Pursuant to the QHWRA, the Section 8 tenant-based certificate and voucher programs were merged by final rule adopted in October 1999. 24 Parts 888, 982, Fed. Reg. 56,894 (Oct. 21, 1999). The new tenant-based program is called the Housing Choice Voucher Program.

²²§§ 982.627(a)(1), 982.625(b).

²³§ 982.627(a)(2).

²⁴§ 982.627(b).

²⁵§§ 982.627(a)(6); 982.633(b)(7).

²⁶§ 982.627(e).

²⁷§ 982.630.

²⁸§ 982.633(b)(8).

²⁹§ 8(y) of the United States Housing Act of 1937, 42 U.S.C.A. 1437f(y)(1)(B)(West Supp. 2000).

³⁰§ 982.627(c); 65 Fed. Reg. at 55,149-50.

³¹Id. It is noted that "net family assets" as defined in 24 C.F.R. 5.603(d) is amended to exclude the value of a home being purchased with Section 8 homeownership assistance for the first ten years after the home is purchased. It is unclear whether this exclusion is extended if the maximum term of assistance is extended beyond ten years. Compare § 5.603(d)(4) and § 982.634.

³²See 65 Fed. Reg. at 55,138.

³³§ 8(y) of the United States Housing Act of 1937, 42 U.S.C.A.1437f(y)(1)(C)(West Supp. 2000).

³⁴§ 982.627(d).

³⁵§ 982.627(d)(3).

³⁶§ 982.628(a). Also see generally § 982.352. Ineligible housing units include public housing and Section 8 project-based units, nursing and board and care facilities, college dormitories, institutional housing and other specified types of housing. In determining the eligibility of housing units, paragraphs (a)(6), (a)(7) and (b) of § 982.352 do not apply to units purchased with homeownership assistance. § 982.628(a)(1).

³⁷§§ 982.628(a)(4) and (5), 982.631(a). Although the PHA may decide to do so, there is no requirement that the PHA conduct periodic HQS inspection after the home is purchased. § 982.633(b)(8).

³⁸§§ 982.628(a)(4), 982.631(b). 

³⁹§ 982.628(b).

⁴⁰§ 982.601(b); 65 Fed. Reg. at 55,147.

⁴¹§ 982.628(a)(2).

⁴²§§ 982.305(b)(4), 982.317.

⁴³§§ 982.627(a)(7); 982.631(c). This requirement does not apply to existing cooperative members.

⁴⁴Id.

⁴⁵§ 982.632(b).

⁴⁶§§ 982.632(c), (d) and (e). Moreover, and as discussed above, the PHA may elect to make the homeownership assistance payments directly to the family or to the lender on behalf of the family. Id. at § 982.635(d).

⁴⁷§ 982.634(c). The elderly exception only applies to families which qualify as elderly at the beginning of the term. For disabled families, the exception applies at any time the family becomes a disabled family while receiving homeownership assistance. If the family later ceases to be elderly or disabled, the maximum term becomes applicable from the date homeownership assistance was commenced. Id.

⁴⁸§ 982.634(a).

⁴⁹§ 982.635(e). Both the regulations and HUD's comments to the proposed rule are ambiguous about whether an assistance payment will continue automatically and what circumstances would warrant a continued assistance payment, for six months after the last housing assistance payment is made on behalf of the family. Moreover, it is unclear whether this extension applies after the expiration of the maximum term of assistance or is only applied during the term.

⁵⁰Id.

⁵¹§ 982.637. 

⁵²§ 982.636.

⁵³§ 982.640; see also 65 Fed. Reg. at 55,135, 55,143, 55,158.

⁵⁴§§ 982.638(a), (b) and (c).

⁵⁵§ 982.638(d). HUD further requires the PHA to deny continued voucher rental assistance if the family defaults on an FHA-insured mortgage and the family fails to convey title to HUD or its designee and to move from the home as required by HUD. Id.

⁵⁶Id.