What is a USDA 538 Loan?

As part of its mandate to develop farming communities, the United States Department of Agriculture (USDA) provides affordable loans to build housing for low and moderate income families in rural areas. The U.S. government guarantees the loans of commercial lenders, with programs like USDA 538 loan guarantee program, who then provide financing to developers of low and moderate income multifamily projects in rural areas.

What Are The Benefits Of The USDA 538 Loan Program?

If you have a multifamily housing project intended to benefit the rural community then the USDA 538 loan could be the perfect choice.

The 538 program includes:

  • A federal guarantee of up to 90%.
  • Non-profit, public and tribal entities can get guarantees of up to 97%.
  • The loan can be used for various development costs, refer to list below.
  • The Interest rate is fixed throughout the term of the loan.
  • You can use the USDA 538 loan in conjunction with other sources of finance such as LIHTC or even other commercial and multifamily loan programs.

Who Is Eligible For A USDA 538 Loan?

You must be a property developer with plans to construct new multifamily housing or make major renovations to housing for low and moderate income families in a rural area. The following entities may apply:

  • For-profit organizations including LLCs.
  • Not-for-profit organizations.
  • Federally recognized tribes.
  • State and local government agencies.
  • Individuals.

What Can USDA 538 Loan Proceeds Be Used For?

The USDA 538 loan program seeks to create housing for low and moderate income tenants within rural communities. The following is an abbreviated list of what you can do with the money. A more detailed list can be found on the Code of Federal Regulations:

  • New housing construction
  • Rehabilitation of a housing project
  • Purchase an existing building
  • Acquisition and improvement of existing land on which housing will be located
  • Development of on site and offsite improvements essential to the use of the property
  • Education costs for board members
  • Construction interest accrued on construction loan

What Are The Tenant And Housing Profile Requirements?

The USDA 538 loan was designed to create housing for a specific tenant profile. The tenant:

  • Must earn no more than 115% of the area’s median income (AMI) adjusted for family size.
  • May be an individual or family.
  • Rent charged including utility bills cannot exceed 30% of 115% of adjusted AMI.

Additionally, the intended multifamily property must satisfy the following criteria to qualify;

  • Must be in a rural area or town with population not larger than 35,000, or on tribal land. Click this link to use USDA’s map tool to search to see if your market qualifies.
  • Must consist of at least 5 units.
  • Must be located close to essential services such as hospitals, schools, shopping malls etc.
  • Cannot be located close to risky or nuisance areas like railway tracks or environmentally unsafe zones.
  • The housing may not be used to house students, migrants or used as a health facility.

What Are The USDA 538 Loan Terms?

  • Leverage up to 90% loan to cost
  • Up to 40 years fixed and fully amortizing
  • There is no limit on the principle borrowed
  • Interest rates are fixed throughout the loan tenure
  • If the loan is intended for rehabilitation of housing, the cost of rehabilitation must be more than $6,500 for each unit
  • Timing for execution is generally 5 months
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