Let’s take a closer look at what an RHS loan is, the various types of RHS loans,and who qualifies for them, so you can determine if it makes sense for your situation.
Definition and Example of an RHS Loan
An RHS loan, or Rural Housing Service loan, aims to help low- to moderate-income rural residents secure housing. It’s guaranteed by the USDA’s Rural Housing Service, which supports rural residents. If you live in a rural area and earn a modest income, but can’t qualify for a conventional mortgage, an RHS loan can be a good option. To be eligible for an RHS loan, you must meet the USDA Rural Housing Service requirements. For example, for a Single Family Housing Guaranteed loan, requirements include that the property must be in a defined “rural” location and that you earn no more than 115% of the area median income (AMI) for your specific area. Your debts must be no more than 41% of your gross monthly income.
How RHS Loans Work
There are several types of RHS loans aimed at different borrowers and that work in different ways.
Single-Family Housing Guaranteed Loans
A Single-Family Housing Guaranteed loan is worth considering if you are in a rural area and earn a moderate income, but don’t have the credit or down payment to qualify for a conventional mortgage. These 30-year loans are provided directly to individuals by approved lenders and backed by the RHS. Once you’re approved, you may be able to get a low interest rate without a down payment, but you will still have to meet certain mortgage requirements to ensure you can afford the monthly payments. A Single-Family Housing Guaranteed Loan can cover up to 100% of your property’s appraised value and upfront costs such as closing costs, legal fees, and other related expenses. You may also apply for down-payment assistance to help you pay for these out-of-pocket costs.
Single-Family Housing Direct Loans
Single-Family Housing Direct loans are aimed at low- and very-low-income buyers in rural areas. The program provides payment assistance as a subsidy to reduce mortgage payments for a period of time. The amount of assistance you receive will depend on your adjusted family income, which needs to be below the low-income limit in the area where you’ll buy the house. You need to demonstrate a willingness and ability to repay the loans. Among other criteria for a Single-Family Housing Direct loan:
Have no decent, safe or sanitary housingCan’t get a loan from other sourcesOccupy the home as your primary residenceProperty must be less than 2,000 square feetMust not use the property to generate income
Multifamily Housing Loans
The USDA Rural Housing Service also offers financing for properties in rural areas through Multifamily Housing programs. These loans are geared for projects for low-income, elderly, or disabled borrowers in rural areas, as well as for housing for domestic farm laborers. These loan programs include (but are not limited to):
Farm Labor Direct Loans & Grants: Loans and grants to develop housing for seasonal or year-round farm laborers. Loans can have terms of up to 33 years with a 1% fixed rate.Multifamily Preservation and Revitalization (MPR) Loans and Grants: This program restructures loans for housing projects that improve and maintain the accessibility of affordable, safe rental housing for those with low incomes. Borrowers must continue to provide affordable rental housing for 20 years or the remaining duration of a USDA loan.Multifamily Housing Direct Loans: This program offers affordable financing options for housing projects for low-income, elderly, or disabled individuals in rural areas. These are low-interest rate loans for up to 30 year. Funds can be used to construct, improve, or purchase multifamily housing.Multifamily Housing Loan Guarantees: This loan program backs loans made by commercial lenders that are providing financing for multifamily projects providing affordable rental housing for lower-income rural residents.
Pros and Cons of an RHS Loan
Before you take out an RHS loan, keep these advantages and drawbacks in mind.
Pros Explained
Low down-payment requirements: Unlike a conventional mortgage, an RHS loan can provide financing without requiring a down payment. This is an advantage if you’re short on cash. Less-strict credit requirements: Most conventional mortgage lenders won’t approve you if you don’t have a good credit score. You can still get an RHS loan with a reasonable credit score as long as you can show your income will allow you to repay it. Lower rates: Many RHS loan programs offer lower rates, such as 1% rates for financing for projects providing affordable housing to farm laborers.
Cons Explained
Home must be in a rural area: RHS loans are specifically designed to help borrowers purchasing homes in rural areas. If you prefer a home in an urban area or your property doesn’t qualify as rural, an RHA loan won’t be an option.Income thresholds: If your income is higher than the income limits of the loan program, you won’t qualify. RHS loans are geared toward those who have lower or moderate incomes.
