While the great majority of vouchers are used for tenant-based rental assistance, agencies may use some vouchers to help families purchase homes or to provide project-based rental assistance. Homeownership vouchers are used to meet mortgage payments and other ongoing costs of homeownership. HUD has recently issued regulations that would allow one year’s worth of voucher payments to be used in a lump sum for a downpayment, if Congress specifies in an appropriations act that voucher funds may be used this way.

There is no limit to the proportion of its vouchers that an agency may allow to be used for homeownership, but agencies must still comply with the regular eligibility and targeting rules described above. As a result, most of the relatively few agencies that have implemented voucher homeownership programs use the new program feature to help families already receiving voucher assistance make the transition to homeownership.

An agency can also set aside up to 20 percent of its vouchers as project-based vouchers, which can be used only at a designated housing development. An agency may use project-based vouchers to support construction or rehabilitation of affordable housing (by guaranteeing the developer a steady stream of revenue that can help repay debts incurred during construction) or to ensure that affordable housing is available to voucher holders even when housing markets are tight. After one year, families living in project-based units are eligible to move to a unit of their choice using the first tenant-based voucher that becomes available.

How Are Housing Vouchers Funded?

The voucher program is funded entirely by the federal government. The annual funding each agency receives for existing vouchers is often referred to as “renewal funding” because it is technically provided through the renewal of an annual contract between HUD and the housing agency governing the use of voucher funds.

Each housing agency can receive funding only for the vouchers it is authorized to administer. An agency’s number of “authorized vouchers” is not determined by any single formula. Instead, it is essentially the sum of the vouchers that the agency has been awarded since the start of the voucher program.

The amount of funding each agency receives per voucher is based on the actual cost of its vouchers during the previous year, adjusted for inflation. For each voucher a family uses, the housing agency receives an administrative fee. The amount of administrative funding a housing agency receives is based on a formula that reflects local employment costs and other special costs of serving the families in its area.

Under a new system enacted by Congress for fiscal year 2003, agencies initially receive funding only for their vouchers that are actually in use. To obtain funding for additional vouchers that they are able to use (up to their total number of authorized vouchers), agencies must access a “central fund” that acts as a reserve. Housing agencies also have access to “program reserve” funds, which are assigned to individual agencies but held centrally in the federal treasury. Each agency is assigned a program reserve equal to one-twelfth of its total voucher funding and may obtain additional reserve funds if needed.

The central fund and program reserves are crucial to the voucher program because many of its costs are unpredictable. The cost of vouchers depends on local rents and the incomes of voucher holders, both of which can vary in unforeseen ways. In addition, shifts in local housing markets can enable more families to use their vouchers, causing an unexpected increase in an agency’s funding needs. Reserve funds enable agencies to respond to these developments without cutting back on the assistance they provide to current voucher holders.

Until fiscal year 2003, housing agencies could, and often did, receive funding for more vouchers than they were able to use. As a result, a number of agencies did not use all of their voucher funds. Unused funds have either been recaptured by HUD and used elsewhere in the Section 8 program or rescinded by Congress and used for other purposes. This problem appears to have been eliminated by the fiscal year 2003 appropriations act, which established the current system of funding only vouchers in use. It is expected, however, that through fiscal year 2004 HUD will continue to recapture some unspent funds awarded under the old system.

In most years Congress funds some new vouchers in addition to renewing existing ones. New vouchers generally receive separate funding allocations in appropriations bills. About 40 percent of new vouchers in recent years have been tenant protection vouchers (see box on page 4); since these vouchers act as replacements for lost project-based units, they do not actually lead to a net increase in federal housing assistance.

New vouchers that do not replace lost housing units are referred to as incremental vouchers. Most incremental vouchers are general-purpose vouchers, which HUD calls “fair share vouchers.” HUD distributes these vouchers among the states based on a formula and then allocates them to housing agencies within each state on a competitive basis. “Special purpose vouchers” other than tenant protection vouchers are generally awarded through national competitions.