USDA RHS Loan: What Is It and How Can It Help You?
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The Bottom Line
RHS loans allow low-to-moderate-income borrowers to purchase rural properties with zero money down, lower mortgage insurance costs, and interest rates that are more favorable than with many other types of financing.
The RHS loan program can help lower-earning homebuyers purchase properties within approved rural communities with no money down. However, an RHS-backed mortgage may not be the right choice for everyone.
We’ll go over everything you need to know about RHS loans to help you determine whether they may be a good fit for your real estate financing needs.
What Is an RHS Loan?
An RHS loan is a type of financing offered through the Rural Housing Service (RHS), which operates as part of the United States Department of Agriculture (USDA). RHS loans falls under the USDA loan umbrella but come with slightly different requirements and benefits.
While the RHS offers a variety of loan programs, most borrowers are interested in the agency’s single-family housing program.
These Rural Development loans allow qualified borrowers to purchase eligible rural properties with no money down. In some cases, these mortgages can come with subsidized interest rates. Even for applicants not eligible for subsidies, rates tend to be lower than conventional alternatives, thanks to the program's strong government backing.
RHS Single Family Housing Loans
Homebuyers planning to purchase property within designated rural areas can use the RHS single-family housing program—sometimes referred to as section 502 loans—to buy with no money down and mortgage insurance costs lower than comparable conventional or FHA financing.
These mortgages are available as both direct and guaranteed loans, the eligibility for which is determined by the borrower’s household income level.
Single-Family Housing Direct Loans
Direct loans for single family housing are originated through the Rural Housing Service. These loans are available to households earning less than 80% of their area median income (AMI).
Most RHS direct loans have a term of 33 years, although borrowers who earn less than 60% of their AMI may qualify for an extended repayment schedule of up to 38 years.
While RHS direct loans are issued at current market interest rates, borrowers can qualify for payment subsidies which may reduce their effective rate to well below market rates. However, some or all of this subsidy may need to be repaid when the borrower sells their home or ceases to occupy it as their primary residence.
Single-Family Housing Guaranteed Loans
Single-family housing guaranteed loans are originated by private lenders and insured by the Rural Housing Service. These loans are available to qualified households who earn up to 115% of their area median income.
The vast majority of RHA loan users choose this program over the Direct program since it is more widely available and flexible.
RHS-guaranteed loans always have fixed rates – adjustable-rate mortgages are not offered under program guidelines – and must be for a term of 30 years.
RHS single-family housing guaranteed loans have interest rates based on current market trends. However, because of their government backing, borrowers may qualify for lower rates than with comparable conventional mortgages.
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“[The RHS program] reduces the risk to the lender of extending 100% loans to qualified rural homebuyers. The effect is that lenders will consider offering more favorable terms to those borrowers who might not qualify for conventional loans, thereby expanding the pool of potential homeowners."
RHS Loan Guarantee Fees
All RHS single-family housing loans come with two types of guarantee fees: an upfront fee of 1% of the loan amount and an ongoing annual fee of 0.35%, which is divided evenly among the monthly payments.
Although not technically mortgage insurance, these fees serve to ensure the ongoing viability of the RHS home loan program. Compared to the FHA's mortgage insurance premium (MIP) and the private mortgage insurance (PMI) required on conventional loans with less than 20% down, most borrowers will save money with the RHS.
Here’s a quick comparison chart of what fees you could expect on a 30-year fixed-rate mortgage with the RHS compared to a similar FHA or conventional loan.
Upfront Fee | Annual Fee | |
RHS Loan | 1% | 0.35% |
FHA Loan | 1.75% | 0.50% to 0.75% |
Conventional Loan | n/a | 0.17% to 1.86%* |
*current rates through PMI provider MGIC
While conventional loans do not have an upfront fee, their ongoing private mortgage insurance is risk-based. This means that even though some borrowers with excellent credit and a large down payment may qualify for lower costs, most borrowers will pay much more.
Conventional PMI, however, is cancellable once you reach 20% equity in your home. The RHS annual fee, on the other hand, continues for the life of the loan. Once they’ve built up enough equity, many RHS borrowers refinance conventional to eliminate this expense.
RHS Loan Income Limits
As we mentioned before, RHS loans have income limits that apply to all adult members of the household – not just those applying for the loan.
In most areas, this limit is currently well over $100,000 per year, and even higher for families of five to eight members.
Requirements for RHS Single Family Housing Loans
What does it take to qualify for an RHS single-family housing loan? Here is a breakdown of the requirements for both borrowers and the properties they purchase.
Borrower Requirements
Credit Score: While the RHS does not have a required credit score for its loans, most lenders offering guaranteed mortgages look for a median score of at least 640. This is the minimum needed to qualify through the program's automated underwriting system. However, borrowers with lower scores and those without an established credit score can still be eligible through manual underwriting.
Debt-to-Income (DTI) Ratio: The housing expenses related to your mortgage can be up to 29% of your monthly qualifying income. Your total monthly debt obligations, including your mortgage payment, can be as much as 41%. With compensating factors, it may be possible to qualify with a total DTI as high as 44%.
Employment History: The RHS requires borrowers to have a stable and dependable income in order to be eligible for a loan. In most cases, this means at least two years of steady employment. However, applicants can qualify with as few as twelve months of work history as long as their employment is likely to continue for the foreseeable future. Unlike other programs, education does not count toward the two-year employment minimum.
Household Income Limits: The cumulative income of all adult household members must be within RHS income limits for the area where the property is located and is limited to 115% of the area’s median income.
Property Requirements
Property Location: Properties must be located within RHS-designated rural communities. In most cases, this means communities with fewer than 20,000 residents. However, some areas can qualify with up to 35,000 residents so long as they retain rural characteristics.
Property Usage: For the RHS single-family housing program, only properties that will be occupied as primary residences qualify for funding. You cannot use an RHS section 502 loan to purchase a second home or investment property. You must also plan to reside there for a minimum of one year.
Property Type: You can use an RHS loan to purchase standard site-built residences, manufactured or module homes, condos, townhouses, or properties within a planned unit development (PUD). You can also obtain an RHS construction loan to finance the costs of building a new home from the ground up.
Income-Generating Properties: Rural properties with aspects designed for generating income will not qualify for an RHS single-family housing loan. This can include working farms and properties with land leases in place, as well as those with multiple units that could be rented out. Properties with accessory dwelling units (ADUs) may qualify so long as the ADU will not be used to generate income.
Home Repair Loans and Grants
Existing homeowners can access funding for home repairs through the RHS section 504 program. This includes loans up to $40,000 and grants up to $10,000. RHS home repair loans have a repayment term of 20 years at low rates. Grants do not require repayment unless the property is sold within three years of issuance.
Keep in mind, however, that this program is for current low-income homeowners and differs from an RHS renovation loan, which allows you to purchase and fix up a property while including the cost of improvements in your new mortgage.
RHS Loans: Frequently Asked Questions
Still unsure whether an RHS loan is right for you? Here are answers to some of the most frequently asked questions regarding the RHS single-family housing program.
Is RHS the Same as USDA?
The Rural Housing Services operates as part of the United States Department of Agriculture. As such, you will commonly see RHS loans referred to as USDA loans. This is most frequently used when referring to the agency’s single-family housing program, particularly among lenders who offer these types of mortgages.
How Long Is the RHS Loan Term?
The RHS loan term is 30 years for the standard single family loan program. The standard RHS loan term for direct loans is 33 years, although borrowers earning no more than 60% AMI with a need for a longer repayment schedule can qualify for a loan term of up to 38 years.
Do You Have to Be a US Citizen to Get an RHS Loan?
No, you do not have to be a US citizen to get an RHS loan. However, you need to have permanent residency (as a non-citizen national or qualified alien) with a legal right to maintain employment.
RHS Loans: How to Get Started
With flexible credit score requirements, lower interest rates, and 100% financing available, RHS-backed mortgages are an excellent option for borrowers who have difficulty saving up a down payment or may not meet the criteria required for other types of mortgages.
To find out if you qualify for an RHS loan, get in contact with an agency-affiliated lender who funds home purchases in your area.
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