What Is An RHS Loan?

The Rural Housing Service (RHS) is a part of the United States Department of Agriculture and serves to preserve and build housing markets in parts of the country used for farming. In addition to the farms, our economy also relies on the workers who help with agricultural production and getting the product through the supply chain and into grocery stores. While low-paying, these jobs are vitally important and RHS loans are designed to serve these low-income residents in off-the-beaten path areas. Rocket Mortgage^® does not currently offer RHS loans, but we wanted to make potential first-time home buyers aware of this type of mortgage product in the event you think you might qualify.

(Obtenga más información sobre el préstamo de RHS en español.)

Guaranteed by the USDA’s Rural Housing Service, RHS loans are designed to help low-income rural residents qualify for a conventional mortgage. These loans often come with zero down payment and lower interest rates.

What Is The Rural Housing Service?

The Rural Housing Service was formed in 1934 (and renamed in 1996) to help rural residents, who could not otherwise obtain credit, buy a home. Currently, the RHS is within the USDA, but works closely with Ginnie Mae (Government National Mortgage Association or GNMA), a government sponsored entity that works to guarantee mortgages to low income individuals.

By “securing” the loans, the government (via the USDA in this instance) mitigates the credit risk low-income applicants pose to banks, by acting as an informal co-signer: they’ll pay back the lender if the applicant defaults on the loan.

In addition to helping home buyers purchase a property, the RHS also offers loans and grants to make home repairs that will improve the health, safety, or energy-efficiency of qualifying homes. They also help bolster loan programs for vital services in rural areas such as emergency response, health care, child care and more.

Can I Qualify For An RHS Loan?

RHS loans were designed for those dwelling in rural areas with a modest income who cannot obtain home financing through traditional means. For example, a farm worker who can prove steady employment and lawful residency would be a great candidate for an RHS loan as they typically do not have credit history to meet criteria for a conventional mortgage through a traditional brick-and-mortar lender.

In order to qualify for an RHS loan, applicants must meet a whole host of application criteria – most of which is related to property location – and income and be able to substantiate it all. But, for those who do qualify and can produce the documentation required, homeownership and a low interest loan await them at the finish line.

Applicant Requirements

Applicants must be able to prove they cannot qualify for conventional loans and certify they will be using the home as a primary residence. Noncitizens are eligible, as long as they can provide both lawful residency documentation for the head of household/borrower and proof of income eligibility.

Income eligibility:

• Applicants must prove they make no more than 115% of the income limit for their area. Check income limits in your ZIP code.
• Applicants must provide similar documentation as to what is required for a conventional loan in order to verify employment and income such as bank statements, W-2s, or a letter from an employer.
• You don’t have to have great credit, but you do have to provide stable repayment history – think 12 months (or more) of on-time payment history.
• For more, view the USDA’s income eligibility guidelines on their website.

Property Requirements 

A home loan with an interest rate as low as 1%? You might be thinking, “Where do I sign?” But these special types of loans are not only for an incredibly specific type of applicant, but also for a specific type of property.

The biggest requirement for a USDA Rural Housing Service loan is in the name: the property must be classified as rural land, but what classifies as rural is currently defined by a nuanced set of tools (either by population density, socioeconomic status or both). How can you find out if your ZIP code area qualifies? You can see if a home is eligible by visiting the USDA’s eligibility site.

There are also other property requirements such as size, property features, and price limits.

• A home under an RHS loan cannot be larger than 2,000 square feet.
• Loan limits vary by state and by county, see here. These are typically determined by what the borrower can afford.
• A qualifying property cannot have a swimming pool, or be used for commercial or other income-producing purposes (think an Airbnb).

Not that rural areas are known for their condo and townhome options, but any type of RHS loan must be used for either a single-family property or multifamily in some qualifying instances.

Single-Family Housing Direct Home Loans

Single-family housing direct home loans are for a person with steady, low to moderate income who may not have enough of a down payment or decent credit history to qualify for a conventional mortgage. Loans of this kind are meant to give clean, safe housing access (RHS properties must conform to the same safety guidelines as HUD homes) to those in lower income brackets.

To obtain SFH Direct Home Loans, an applicant must not make more than 115% of the income limit for their area. Although recent literature from the USDA states that most borrowers who obtain these loans are in the bottom 80% in terms of income for the area. If eligible, applicants for this type of loan will receive interest rates as low as 1%, can obtain a low with zero down payment, and receive the same standard 30-year term as a conventional mortgage.

An RHS loan can be used for up to 100% of the fair market value of a property but it can also include monies for the down payment, closing costs, legal fees, and more. Additionally, no private mortgage insurance is charged, as it is with an FHA loan.

Multifamily Housing Loans And Other Programs

In addition to helping low-to-moderate income families secure single-family properties, the USDA’s rural housing service also offers grants and loans to help preserve properties, maintain and restore historic housing, help elderly and disabled rural citizens maintain their rural properties, and help farmers with multiple units on a property obtain financing and/or rent their units to workers.

Other loan programs offered through the RHS/USDA include:

• Farm Labor Direct Loans and Grants
• Housing Preservation & Revitalization Demonstration Loans and Grants
• Multifamily Housing Direct Loans
• Multifamily Housing Rental Assistance

Agriculture has long been a prized tenet of the American economy, and the government wants to ensure rural residents have access to the same housing opportunities as metro dwellers. For those who fit the criteria, a government loan backed by the USDA through the Rural Housing Service (in much the same way veterans can obtain loans backed by the Veterans Affairs office) could be an alternative financing option to help make the homeownership dream a reality.

Even though Rocket Mortgage^® is not currently offering loans backed by the USDA, readers are still encouraged to talk to a Rocket Mortgage Home Loan Expert to learn more about any and all loan options.