Security Deposits Have Vexed Housing Providers for Years. Do Alternatives Exist?

Security deposits represent a conundrum for owners of affordable housing. For low-income renters, a deposit can prohibit move-in, presenting an unsurmountable financial barrier to signing a lease; for owners and managers, a pre-move-in deposit is one of the few universally understood tools to cover damage, unpaid rent, and the administrative costs that follow a sub-optimal move-out.

That tension is becoming harder to ignore, particularly for Low Income Housing Tax Credit (LIHTC) and U.S. Department of Housing & Urban Development (HUD)-assisted portfolios where household liquidity is thin and compliance expectations are exacting. 

“We had gotten to a point with our affordable deals where we were not requiring a security deposit,” says Melanie Reusze, senior vice president of property management at Kittle Property Group. But after the company saw rising “bad debt” and “more evictions and skips” in a post-pandemic environment, the company moved back to a deposit model in November of last year, introducing a flat-rate deposit structure for most tax credit units.

While some developers are looking to in-house solutions, a growing set of third party vendors argue that traditional deposits are an inefficient — and inequitable — way to manage risk, and that deposit alternatives can reduce move-in friction while still protecting property cash flow. For affordable operators, the practical question often comes down to whether the alternatives work inside the rules, workflows, and resident economics that define LIHTC-assisted housing.

Navigating Liquidity Shock
Move-in costs begin high: Households can face an upfront stack that includes the first month’s rent, utility deposits, and moving expenses. Add a security deposit, and households operating with minimal cash reserves can experience a “liquidity shock,” depleting any buffer that might otherwise keep rents current when an emergency financial event — such as a car repair or medical bill — occurs.

National survey data underscores that fragility: The Federal Reserve’s most recent Survey of Household Economics and Decisionmaking found that only 69 percent of American adults would be able to cover a $500 expense using only current savings. For affordable operators, this means that when move-in drains liquidity, delinquency risk can increase, even among otherwise qualified households.

In response, Kittle attempted to eliminate security deposits in order to provide tenants with an additional financial cushion during move-in. However, the company soon realized that they were missing the critical behavioral and financial screen that security deposits provide: When Kittle allowed residents to move in with “zero deposit,” they “tended to see more skips, more evictions,” says Reusze. “We needed to make sure that they have some skin in the game up front.”

So, in late 2025, the company moved the bulk of their LIHTC portfolio to a flat $250 deposit for applicants approved “with no conditions,” Reusze says. If the application is conditional the deposit can go up to $500. For market-rate units, Kittle still tends to require a full month’s rent, depending on the deal.

The company recognizes that $250 may still represent a burden to cash-strapped households looking to get on their feet. If a household cannot pay the $250 immediately, “we’re willing to split that in two months,” Reusze says. This means effectively using an in-house installment plan to preserve access while still establishing the deposit obligation early in tenancy.

In-house programs such as these do require administrative manpower, and Reusze notes that Kittle is actively “exploring” deposit alternative products again after a prior vendor arrangement “didn’t quite work out.” The promise, in her telling, is that targeted alternatives could help households who are otherwise viable tenants but cannot clear a higher conditional deposit at move-in.

The rules: Section 8 and HUD-assisted housing impose specific deposit requirements
Kittle’s portfolio is largely composed of LIHTC-subsidized units, the company also maintains some HUD-restricted units with “their own special rules” surrounding security deposits, Reusze says.

Denise Muha, executive director of the National Leased Housing Association (NLHA), points to the HUD Occupancy Handbook as the governing reference for many subsidized multifamily programs. In the Project Based Rental Assistance (PBRA) context, “you have to collect a security deposit,” Muha says, adding that the requirements are laid out in HUD Handbook 4350.3.

Chapter 6 of Handbook 4350.3 describes how security deposits must be handled in subsidized multifamily programs. Among other requirements, HUD states that owners must place security deposits into a segregated, interest-bearing account, and that the account balance must equal the total collected deposits plus accrued interest (with additional recordkeeping requirements for certain programs). HUD also directs owners to comply with state and local laws on deposit investment and interest—while emphasizing that when state or local law is silent, owners must compute and credit interest based on the actual rate earned.

On refunds and deductions, the handbook sets a clear clock: Within 30 days after move-out (or a shorter period if required by state/local law), owners must either refund the deposit plus accrued interest or provide an itemized list of amounts owed under the lease and return any unused balance. For operational teams, those timelines translate directly into move-out workflows, documentation standards, and resident communications—especially when a portfolio spans multiple jurisdictions with different landlord-tenant statutes.

The Housing Choice Voucher program (also known as as Section 8) operates differently. Federal regulation provides that an owner may collect a security deposit from the tenant, and that a Public Housing Agency (PHA) may prohibit deposits in excess of private market practice or amounts the owner charges unassisted tenants. That framework leaves significant discretion to PHAs and local practice, while still pulling owners into the orbit of state and local deposit rules on handling and return.

The patchwork regulations surrounding deposits creates a pain point, Muha says, given the burden of significant administrative overhead required to maintain various deposit accounts at scale. For example, a large owner-member recently approached NLHA with concerns about managing deposits in escrow-style structures across tens of thousands of households. In response, Muha has helped to pitch a pilot concept intended to replace many small resident-level accounts with a pooled arrangement that would still give lenders comfort if move-outs increased. Muha says NLHA engaged HUD on whether a waiver could support that approach for a pilot.

The alternative landscape
Over the last decade, a number of third-party companies have popped up promising to ease the burden of security deposits for both tenant and owner. These alternatives tend to cluster into three categories: surety-bonds, insurance-type models, and installment financing products. Each shifts costs and risks differently, and each raises different compliance questions.

The surety bond structure — offered by companies like Deposit Choice and SureDeposit — allows tenants to pay an initial premium at a fraction of the cost of traditional cash deposits. In return, national insurance companies underwrite the bond, thus providing some comfort to operators that lease obligations will be met in a similar manner to traditional deposits.

While the surety bond structure requires an initial payment, an insurance-type model adds an additional premium to tenants’ monthly rents, and in return insuring the unit against damages such as unpaid rent, property and pet damages, and eviction costs. Initially pioneered by LeaseLock in the early 2010s, these structures eliminate the need for a full up-front security deposit while simultaneously reducing owners’ burden of deposit administration.

Operators pursuing these two options must answer several questions to move forward effectively: What triggers a claim? What documentation is required? How quickly are claims paid? What is the resident’s continuing obligation (if any) after a claim? Affordable owners must also determine whether the structure is treated as a fee, a bond premium, or a deposit-equivalent under state law — and how that interacts with HUD deposit-handling rules.

Additionally, operators must scrutinize whether tenants’ premium payments are refundable, as nonrefundable charges can raise issues surrounding local and HUD regulations. Operational teams will also need a clear resident communication plan to avoid confusion at move-out, particularly in mixed-income properties where residents may compare terms.

Other options, such as those offered by Flex Move-in, allows residents the ability to spread out move-in costs by offering a short-term loan for various one-time charges, including security deposit, first-month’s rent, and moving fees. These programs function as specialized consumer loans, with Annual Percentage Rates (APRs) to match; Flex lists APRs between 16.95 and 23.84 percent depending on the plan, in addition to platform fees.

For affordable operators, the value is clear: The property gets paid in full upfront, while the resident amortizes the cost. The trade-off is equally clear: Residents take on consumer debt to fund move-in. That raises questions about disclosures, underwriting impacts, and whether the added payment obligation increases downstream delinquency risk. In subsidized programs, it also raises the practical question of whether financing a deposit changes how the deposit must be held and refunded under program and state rules (because the deposit is still collected — just funded differently).

For operations teams, the value of all three deposit alternative types is administrative as much as financial: fewer escrow-style accounts, fewer deposit refund disputes, and a standardized claims pathway. For affordable portfolios, the critical diligence point is whether these structures can be used in any program where HUD explicitly requires deposits to be maintained in segregated interest-bearing accounts and refunded with itemization and timing requirements.

Across product types, the operational and compliance checklist tends to converge:

• Program permissibility (by asset type): PBRA owners should start with Handbook 4350.3’s deposit rules, particularly account segregation, interest crediting, and refund timing. Voucher owners should confirm whether the PHA has policies limiting deposits beyond private market practice.
• State and local deposit laws: HUD explicitly directs compliance with state/local requirements, and conflicts should be resolved in the tenant’s favor.
  Resident disclosures and fair housing consistency: Offering alternatives only to certain households (e.g., conditional approvals) may be operationally appealing, but it requires consistent, well-documented tenant selection practices.
• Claims mechanics and audit trail: The product is only as good as the operator’s ability to document damage, rent owed, and unit condition, especially when the traditional deposit “refund and itemize” workflow is replaced by a third-party claim.

Bottom line: deposits aren’t vanishing, but the toolkit is expanding

Security deposits remain embedded in the compliance architecture of affordable housing, and operators like Kittle describe concrete performance reasons for retaining them in LIHTC portfolios. Yet, deposits still too often provide barriers to move-in while simultaneously leaving owners burdened with their administration.

Few appealing options exist that have affordable housing operators moving en masse away from deposits — for now. The most realistic near-term shift may be a more selective deployment, with targeted payment plans, carefully vetted alternatives in market-rate or mixed-income tranches, and pilots where program rules allow. The operational mandate is the same either way: protect cash flow, document consistently, and ensure that whatever replaces (or finances) the deposit does not create a new compliance problem while solving an old affordability one.