<p>Once admitted, students are then invited to apply to honors: <a href="http://www.lsa.umich.edu/honors/prospects/index.htm%5B/url%5D">http://www.lsa.umich.edu/honors/prospects/index.htm</a>
Admitted students may also request an honors application. I think all the information is available on the honors site. This is usually about 10% of the entering class (I think) and yes, there is separate housing, although my daughter opted to be on the North campus near the music school and she's happy with that decision. There is also a German dorm (not part of the residential college system) on the North Campus, and I think other similar arrangements for other languages. I think both the honors program and the music school have "small college within big college" feel, so the RC option is just one of many.
You are also correct that applying early is a great idea. D was happy to know she had already been admitted to LSA when she went to her music auditon, but then she still had to wait for the second acceptance. You are also correct that there are some earlier auditions, depending on the instrument, so that's worth checking, but I don't know whether they wait to hear the whole pool before decisions are made, or whether some instruments do get early acceptences as well. Good luck!</p>