Self-Help Housing: Section 502
Unlike Section 8, a popular program for low-income households in need of housing assistance, the Section 502 Mutual Self-Help Housing Loan Program aims to help poor families build homes for themselves. There are many families whose financial circumstances bar them from purchasing affordable housing that is also safe and suitable for living. Section 502 self-help housing is highly uncommon in urban areas and is likely only to be offered and approved for rural communities.
This program is an innovative approach to housing assistance. Instead of simply putting tenants into rental units or circumventing traditional financing options, Section 502 reduces the cost of building so that it becomes attainable for even low- and very low-income families.
It works by combining less restrictive loans with communal labor. Participants in the program work with other participating families to construct homes. When the program is working as it is designed, nearly two-thirds of all the required construction can be completed by recipients of assistance. This drops the cost drastically, making ownership much more feasible.
Qualifying for Section 502
Although this seems like a potential bargain for any would-be homeowner, Section 502 assistance is only available for families that fall into “low” or “very low” income categories. Determining who meets this criteria is accomplished by comparing a household’s income against the median income of the local region. Households earning between half and four-fifths of the Area Median Income (AMI) count as low-income. Households earning below half of the AMI are very low-income.
There are other qualifications as well. First, a family must be without satisfactory housing. It’s usually not a program for families who simply decide they’d prefer something else. What’s more is that the household must be able to make monthly payments. Those payments include the loan’s principle, its interest, property taxes and homeowner’s insurance. These expenses can be represented with the acronym PITI. Households with horrid credit are usually passed over and families in desperate situations are given the first opportunity.
Terms of the loan
Many variables influence the overall terms for a specific family. Generally, the loans can be established for no more than 33 years unless the circumstances are dire. In such cases, a length of up to 38 years can be provided.
Interest rates are usually comparable to rates found on the regular mortgage market. Government subsidies provided through the Section 502 program, however, can drop the effective rate to as low as a single percent.
A household is expected to contribute up to one-fourth of its overall monthly income towards PITI payments. Anything in excess of that amount can be supplemented by the government.
Down payments are not required, simplifying the process, but loans will not be offered to families who appear unable to repay them.
Section 502 does not provide low-income families carte blanche on the home that they want to build. Limits exist with regard to how big and/or expensive the final result may be. A family is required to build something deemed “modest” in size and function. This is not an opportunity to end up on MTV Cribs.
Whatever is built must be reasonably-sized, serve basic household purposes, and not much else. Obviously, it doesn’t need to be a plain box, but anything superfluous is likely to be impermissible. To help keep builders in check, there is a dollar amount they will not be permitted to exceed.
That amount used to be called the “HUD dollar cap,” but that limit ceased to be the standard in 2009. To learn what the limit is currently, contact a local Public Housing Authority or U.S. Dept of Housing and Urban Development (HUD) office.
The new home must also be built in accordance with state and local building codes.
Applications are processed by the Rural Development Community managers. Usually it takes 1-2 months to determine eligibility and come down with an official ruling on a particular case. Don’t be impatient!
Rent-to-Own Your Home!
Low-income families that are already paying monthly rent may do well to look into rent- or lease-to-own units. The beauty of these programs is that you do not lose the entirety of your monthly payments. Generally, you pay rent in exchange for the right to live in the unit as you normally would.
After a predetermined length of time, the renter is offered the option to buy. Most rent-to-own agreements allow a renter to have a portion of his or her monthly rental payment allocated into an escrow for eventual use as a down payment, easing the burden of ownership.
It’s very important to have a contract that both parties 1) understand, and 2) agree to, before proceeding with any sort of rent-to-own agreement. It’s very unwise to overlook a piece of the contract you don’t like because you expect that the other party won’t enforce it or for any other reason.
Both parties can benefit from such an agreement, but you must ensure that you’re not being taken for a ride. If you think that the contract is unfair or does not treat you well, don’t sign it until you can have an expert look it over for you. It’s too important to get wrong.
Things to pay particular attention to are the amount of the monthly payments, the length of time until the option to purchase is presented, whether or not you’ll be permitted to continue renting if you elect not to purchase and how much (if any) of each month’s rent will eventually be usable as a down payment.
Pros and cons for sellers
Most sellers of rent-to-own homes are individuals who are in need of a secondary income or an increase in cash flow. Many times they have moved out of this property into a new home and are having trouble making payments on both.
The best thing for a seller about turning a unit into a rent-to-own property is that it makes it a lot easier to find someone interested in living there. As soon as someone settles in, they begin paying rent. Hundreds or even thousands of dollars start pouring in each month. That can be a huge relief for a seller.
Also, at the beginning of a rent-to-own agreement, the renter is typically required to make a rent option payment. Equivalent to several months’ rent, this payment “purchases” the option to buy. If the renter eventually does choose to buy, that payment is credited as a down payment. Otherwise, the payment is pure income for the seller. It never need be refunded, regardless of the renter’s decision.
On the other hand, the seller is taking a pretty significant risk by entering into a rent-to-own agreement. At the time that the agreement is signed, the seller must commit to the price at which he will sell the home when the lease period ends. That period could be 1, 3, 5, 10 or more years. While it’s nice to have a tenant who is ready to commit to a term in that fashion, there’s no predicting what the housing market will do in that time. If the value of the house doubles, you’re legally required to sell for the old price, should your renter decide that he or she now wants to buy.
Pros and cons for buyers
A huge benefit of renting-to-own for buyers, is that it simply buys time. A few years can go a long way in repairing one’s credit and because a decent credit score is required to qualify for home financing, it’s nice to be able to give it a boost. What’s more is that the buyer gets to live in the house he or she may intend to buy long before ever qualifying for financing.
There is a honeymoon period with any big and new purchase. It seems great while you’re shopping and great when you purchase it. After a while, though, problems may start to become visible. Renting-to-own gives a potential buyer a lot of time to get a true and accurate depiction of not only the unit, but also the local area, the neighbors, the convenience of the location and countless other intangible factors.
Unfortunately, it’s not all roses. A buyer makes serious investments (in both time and money) to a house that still belongs to the seller. Rent option payments, for example, are usually thousands of dollars and are almost always non-refundable. When a home turns out to be a poor investment, that money doesn’t come back.
Some rent-to-own agreements can be very strict. Making late payments can sacrifice the month’s down payment credit. For example, if the rent is due on the 3rd and you pay on the 4th, the $150 that was supposed to go towards a down payment doesn’t. You’ve given it away and now the only thing it goes towards is the landlord’s next vacation.
The most dangerous aspect of the deal, however, is that if the seller stops paying the mortgage, the bank may foreclose on the house and kick you out.
Other housing choices
Renting-to-own is just one option for would-be buyers who do not qualify for traditional financing. Here are two other alternatives:
Wrap financing – for buyers who have a healthy income but a sickly credit score (or some other traditional financing obstacle), a seller may agree to this method of financing. In a “wraparound financing” agreement, the buyer maintains the mortgage. The buyer makes a down payment and signs a promissory note, which is a legally binding “I.O.U.” Each month, the buyer makes payments which the seller can use, in turn, to pay off the existing mortgage. Both parties save on legal fees, but they can be susceptible to similar problems as those listed above.
Land installment contract – this is another method in which the mortgage is maintained by the seller. That condition is what allows the buyer to participate at all (after all, not all sellers will require traditional financing). A land installment contract is an agreement to transfer title to the buyer after certain requirements are fulfilled. The most obvious condition is that the mortgage is paid off, though others could also exist.
Section 8 Homeownership program – not all Section 8 housing is for rent. If you qualify for the homeownership program, you may be able to receive federal aid enabling you to avoid traditional financing and purchase a house of your very own. The local Public Housing Authority (PHA) office can give you more thorough information about his program as it differs from state to state and locality to locality.
If bad credit or low-income is hindering your ability to purchase a home, you may have more options than you realized. Traditional financing is not the only method that can get you into a new home. Call an attorney or your local community help office to learn more.