USDA Rural Housing Programs
USDA operates its housing programs through the Rural Housing Service (RHS), an agency within the Rural Development (RD) division of the department. RHS staff, which is only located in Washington, D.C., establishes the rules and policies for operating the housing programs through regulations, handbooks and other notices. The day-to-day management of the programs is carried out by RD staff, which are located in all 50 states and U.S. territories.
RD loans and grants, except farm labor housing loans and grants, can only be made in rural areas that have a population of less than 20,000 persons that are rural in character and are not contained within a Standard Metropolitan Statistical Area. Towns and areas of 10,000 persons or less that are within a SMSA may qualify for RD assistance if they are rural in character. Areas of less than 35,000 persons that were qualified to receive RD assistance before the release of the 2010 decennial census continue to be eligible for RD services until the release of the 2020 decennial census. USDA maintains a website that allows visitors to determine whether a particular address is within an eligible rural area.
There are forty-seven RD state offices each of which is responsible for the administration of the RD programs in one or more states and territories. State offices are overseen by state directors who are presidential appointees. State directors change after a new president takes office. Typically, each state office has a multi-family and single family housing chief and other staff members responsible for supervising operations and providing technical assistance in the states. There are RD sub-state offices in practically all states and territories.
Statutory and Regulatory Program Framework
All the RD housing programs are authorized by Title V of the Housing Act of 1949, which is codified at 42 U.S.C. §§ 1471 through 1490t. Most RD programs are identified by the section of the Housing Act of 1949 that authorizes them. Program regulations can be found in 7 C.F.R §§ 1800 through 2029 and §§ 3500 through 3599. RD has issued handbooks for each of its major programs, which supplement and clarity its program regulations. Periodically, RD issues Administrative Notices (ANs) and Unnumbered Letters (ULs) that modify or explain its regulations on an interim basis.
Appeal of RD Decisions
USDA has a National Appeals Division (NAD) which hears applicant and borrower appeals of RD decisions. Regulations governing the appeals process are set out at 7 C.F.R. Part 11. Redacted NAD decisions are all posted and searchable.
Multi-family Housing Programs
Section 515 Rural Rental Housing Direct Loan Program
Section 515 of the Housing Act of 1949 authorizes RD to make direct loans for rural rental housing (RRH). The program, which originated with the Senior Citizens Housing Act of 1962, has produced over 500,000 housing units. Currently, there are nearly 14,000 RRH developments with over 410,000 units.
Section 515 loans are made at a market-rate interest rate for a term of up to 50 years to private, public, and nonprofit groups or individuals to provide rental or cooperative housing for low- and moderate-income families and individuals, including senior citizens and persons with disabilities. Loan funds may be used to construct new housing, purchase new or existing housing, to rehabilitate existing housing and preserve existing RD Section 515 developments. Housing constructed exclusively for the elderly or persons or families with a disability may be restricted in occupancy and may take the form of congregate or group homes. Many Section 515 developments are also partially financed under the Low-Income Housing Tax Credit Program.
All 515 developments have a shallow Interest Credit subsidy. About 70% of all 515 units have a deep subsidy known as Rental Assistance (RA). Residents receiving RA typically pay 30% of income for rent and utilities. Some developments have Project-Based Section 8 or other subsidies. All subsidized developments operate on a non-profit or limited profit basis. A small number of early 515 developments operate on a for-profit basis without any subsidies.
Owners of Section 515 housing financed after 1989 are required to operate the housing for the term of the loan. Owners of Section 515 developments financed between 1978 and 1989 were required to maintain the housing as affordable housing for 20 years. These use restrictions have now expired, however, and prepayment restrictions have been imposed on all developments financed before 1989.
Households eligible to live in Section 515 housing must have very-low, low, or moderate incomes. Although RD regulations state that persons living in Section 515 housing must be U.S. citizens or persons admitted to the U.S. on a permanent basis, this requirement was suspended shortly after the regulations were published in 2004.
Residents of Section 515 housing have a right to grieve owner actions or decisions that adversely affect them through a grievance and appeals process. However, evictions, which must be for good cause, are exempted from this appeals process. Evictions must, however, be accomplished through state judicial proceedings and owners must give residents the right to cure any proposed eviction.
Some Section 515 developments are restricted to elderly households and households with a person with a disability. In fact, over 60% of Section 515 housing is occupied by persons from these two groups.
Regulations for the program are codified at 7 C.F.R. Part 3560.
Section 538 Guaranteed Rental Housing Loan Program
Section 538 loans are in most respects identical to the Section 515 program loans except that financing for the construction comes from private lending institutions, which receive RHS guarantees against the borrower defaults. Section 538 loans are made at prevailing local market interest rates and have no RD subsidies attached to them. They can serve households with up to 115% of area median and, as a result, typically serve higher income households than the Section 515 program. However, many 538 developments are also assisted under the Low Income Housing Tax Credit program, thereby, allowing them to serve some lower income households. Section 538 loans are not subsidized and are not restricted with respect to prepayment. Generally, loans cannot be prepaid during their term, which may extend to 40 years.
Residents of Section 538 housing do not have to be citizens or persons admitted for permanent residency in the U.S. They do not benefit from the income deductions that are available to Section 515 households. They have the right to appeal adverse decisions, except evictions, under the resident grievance and appeals process. Neither the RD regulations nor the program handbook HB 1-3565 guarantee residents the right not to be evicted except for good cause. However, there can be little doubt that residents of the housing are entitled to such right.
Regulations for the program are codified at 7 C.F.R. Part 3650.
Section 514 and 516 Farm Labor Housing Programs
RD has two programs to assist in the construction of rental housing for migrant, seasonal, and year-round farm laborers. The first of these is a one-percent mortgage loan program authorized by Section 514 of the Housing Act of 1949. The second, authorized by Section 516 of the same act, is a grant program, available only to nonprofit and public agencies, including Indian Tribes, which can cover up to 90 percent of the development costs. The purposes of the two programs are identical: to provide decent, safe, and sanitary housing for domestic farm laborers. Loans are available to farm owners, associations of farmers, private or public nonprofit corporations, states and their political subdivisions, Indian tribes, and private or nonprofit organizations of farmworkers. Loans are made for a term of 30 years.
In most respects, the Farm Labor Housing program operates identically to the Section 515 program. There are, however, several notable exceptions. First, farm labor housing are not restricted to rural areas and can be built anywhere in the U.S. and its territories. Second, because housing is constructed with a loan amortized at one-percent interest, there is no need for Interest Credit subsidy. All projects that do not receive Rental Assistance charge residents the same rent for a similar size and type unit regardless of income. Rental Assistance is available for up to 100 percent of the households in a project sponsored by a nonprofit or public agency. Project Based Section 8 assistance is also available in a small number of farm labor housing developments. Section 514/516 housing may be built for year-round or seasonal occupancy that is not longer than six months.
Section 514 loans are made to individual farmers who agree to use the housing for their own farm laborers. They may or may not charge a rental fee provided that farmers that do not charge rents are required to inform tenants that the housing is free.
Eligible residents must be U.S. citizens or persons admitted to permanent residence and must receive a substantial portion of their income from farm labor. Owners, with the exception of associations of farmers or family farm corporations or partnerships, may not exclude occupants from their housing because the residents work for a particular farmer or association of farmers. Tenants who cease to be farmworkers must vacate the housing unless they retire from, or are disabled by, farm labor.
Residents of farm labor housing may not be evicted except for good cause and are eligible to appeal landlord decisions under the tenant grievance and appeals process.
Section 514 and Section 516 loans are subject to the same prepayment restrictions that apply to Section 515 loans.
The regulations codified at 7 C.F.R. Part 3560 are applicable to RD farm labor housing. 7 C.F.R. Part 3560, Subpart L and M specifically deal with additional requirements applicable to the programs. Subpart L is applicable to Off Farm Labor Housing and Subpart M is applicable to On Farm Labor Housing.
Single Family Homeownership Loans
There are two types of Section 502 loans: Insured Section 502 loans made directly by RD to low- or moderate-income persons for the purchase, construction or rehabilitation, refinancing, of modest single family homes and Guaranteed Section 502 loans that are made by commercial lenders to persons whose incomes do not exceed 115 percent of the median income for the area in which the loan is made. RD guarantees these loans against default to encourage commercial lenders to make loans to borrowers perceived as a high risk.
Section 502 Direct Homeownership Loan Program
To be eligible for a direct Section 502 loan, a person must have low- or moderate-income; not reside in or own housing that is decent, safe, and sanitary; be unable to obtain a loan from private lending institutions on reasonable rates and conditions; have sufficient income to repay the RD loan; and after the loan is made, reside in a rural area.
Direct loans are made at a market rate of interest set at the time the loan is made. Most Section 502 loans are made for a term of 33 years. RD may extend the loan term to 38 years to permit persons whose incomes do not exceed 60 percent of the area median income to purchase a home when they would not be able to purchase that home if it were financed for only 33 years. RD is also authorized to defer up to 25 percent of the amount of their monthly payment for an annual term, renewable for up to 15 years.
Section 502 direct loans to low- and moderate income households are subsidized through one of three interest-reduction programs called Interest Credit, Payment Assistance I, or Payment Assistance II. The choice of subsidy programs depends on when the borrower entered into the RD loan. Borrowers currently entering the program are only eligible for Payment Assistance II. These programs lower the borrower’s effective rate of interest on the loan to as low as one percent. The actual amount of subsidy any borrower receives depends on the type of subsidy the borrower receives, the borrower’s income, and the amount of the loan.
The subsidies are extended to borrowers under two-year agreements that are renewable for as long as the borrower is eligible for assistance. On renewal, the subsidies are adjusted based on the borrower’s current income. Persons whose incomes decline during the term of an agreement may receive additional subsidy before the end of the term provided they are not already receiving the maximum subsidy.
Persons who qualify for Section 502 loans are eligible to receive up to 100 percent of the cost of the unit’s purchase, construction, or rehabilitation. No down payment is required for the program, and closing costs may be included in the loan. All housing financed with Section 502 funds must be decent, safe, and sanitary after purchase or completion. It must also be modest in design and cost. Generally, this is interpreted to mean that it must meet RD development standards, may not exceed RD’s applicable market area loan limits, the family’s need for space, and may not exceed 2,000 square feet of living area. Amenities or land exceeding that required for a modest home may not be financed with Section 502 funds.
Although newly constructed contractor-built homes were the type of housing most frequently financed with Section 502 funds, a large proportion of RD loans are now being made for the purchase of existing housing. A small but significant number of loans are made to participants in the self-help housing programs who construct their own homes, typically joining 10 to 20 other families to undertake a major portion of the construction and contracting for portions of the work requiring skilled labor. Usually a local private nonprofit organization funded by RD under Section 523 of the Housing Act of 1949 organizes the borrowers and provides them with technical and supervisory construction assistance.
Persons who obtain Section 502 loans are eligible for various services from RD to assist them in contracting or constructing their homes, meeting their financial obligations, or overcoming special problems such as defects in construction or loss or reduction of income during the term of the loan. Advice and technical assistance are available in the form of financial counseling, construction supervision, and inspection.
Borrowers facing financial difficulties due to circumstances beyond their control may obtain assistance from RD in the form of additional subsidies not to exceed the maximum amount of assistance authorized under the subsidy program, a moratorium on payments for up to two years, or reamortization or refinancing of their loan.
Although most loans are made for a term of 33 years, borrowers obligate themselves to refinance the loan whenever they are able to obtain private commercial financing at rates and terms that are both affordable and reasonable. This refinancing is mandated by law and is intended to prevent competition between RD and private lending institutions.
Borrowers who have obtained RD loans since October 1, 1979, and who have also received interest subsidies are subject to “recapture” of part of that assistance when they sell or transfer their homes for a price higher than the original purchase price. The actual amount recaptured is based on the increased value of the home, the amount of subsidy received by the borrower, and the number of years the borrower has had the loan.
Regulations for the direct loan program are codified at 7 C.F.R. Part 3550. There are two handbooks for the program: HB 1-3550 is the Field Office Handbook and deals with loan making; HB 2-3550 is the Centralized Servicing Handbook and deals with loan servicing issues.
Section 502 Guaranteed Homeownership Loan Program
Guaranteed loans are made by mortgage lenders who receive loan guarantees from RD to encourage them to make loans to borrowers who they would not normally serve. Loans are made for the construction of new homes or the purchase of existing loans.
Guaranteed loans are made for a term of 30 years and are not subsidized. As a result, the program serves homeowners with higher incomes than the direct Section 502 loan program. Lenders are encouraged but not required to extend any form of assistance to borrowers who face hardship for any reason.
Regulations for the program are codified a 7 C.F.R. Part 3555. HB 1-3555 is the Technical Handbook for the program.
Section 504 Home Repair or Improvement Loans and Grants
The home repair or improvement program authorized by Section 504 of the Housing Act of 1949 is designed to assist persons who needed assistance in removing health and safety hazards from their home, making limited additions, or in weatherizing it. Funds may be used for repairs and improvements such as repairing roofs, providing or repairing structural supports, adding a bathroom, providing sanitary water and waste disposal systems, connecting to water and sewer lines, weatherizing or modernizing the home. Funds may not be used to construct new dwellings or add to existing dwellings unless the addition is intended to remove a health or safety hazard. Mobile homes may be repaired with Section 504 funds when the home is attached, or will be attached, to the land owned by the applicant. Homes repaired with Section 504 assistance need not be decent, safe, and sanitary after the work is completed; however, they must not continue to pose significant health or safety hazards to the borrower.
Section 504 assistance is available in the form of loans and grants. Loans are made at a one-percent interest rate, with varying terms depending on the borrower’s repayment ability, but not exceeding 20 years. Loans may not exceed $20,000. Grants of up to $7,500 may be made to persons over 62 years of age who do not have sufficient income to repay part, or all, of a Section 504 loan. Loans and grants may not exceed a total of $27,500.
To be eligible for a Section 504 loan a person must:
- Have a low or moderate income and be able to repay the loan;
- Reside in the home to be repaired, which must be located in a rural area; and
- Be unable to obtain a loan from a private lending institution at reasonable rates and conditions.
Persons receiving Section 504 assistance must be the owners of their home. For purposes of the program, ownership is construed broadly to include ownership by deed or other means, such as by evidence of having paid taxes or by obtaining affidavits from others in the community attesting to the applicant’s ownership. Persons with leasehold interests or life estates also qualify for Section 504 assistance.
All Section 504 loans are evidenced by a promissory note, with loans over $2,500 secured by a deed of trust, mortgage, or security interest in a leasehold. Section 504 borrowers are eligible for the same RD loan servicing options that Section 502 direct borrowers are eligible to receive.
Persons who obtain a Section 504 grant are obligated to repay it if they sell or transfer the home within three years of obtaining the grant.
Regulations for the Section 504 loan and grant programs are codified at 7 C.F.R. Part 3550, Subpart C applies to both the loan and grant program.