Single-Family Housing Direct Loans (Section 502)

A USDA direct loan is provided by the U.S. Department of Agriculture (USDA) to help low- and very-low-income families afford houses in rural areas. This type of financing, also known as a Section 502 direct loan, removes some of the barriers that low-income families face when trying to find affordable and sanitary housing in rural areas.

In order to benefit from the Section 502 guaranteed rural housing loan program, you will need to meet a variety of eligibility criteria, such as income requirements. Upon meeting the program requirements, you can apply for funds to either purchase a new home or make repairs and renovations to an existing residence. When paying back your loan, you may receive a modified interest rate and a longer-than-average repayment period, which is different than FHA and conventional loans. Below, learn everything you need to know about USDA direct loans, and find out how you can apply for one.

The Benefits of a USDA Direct Loan

The Section 502 direct rural housing loan program was designed in order to make it easier for low- and very-low-income families to obtain adequate housing in rural areas. The loan program makes homeownership a reality for families who have no way of obtaining safe, sanitary and adequate homes through other means. As a result of this program, the USDA helps bring more prosperity to rural areas, which increases the quality of life in such areas, as a whole.

One of the best benefits of getting a 502 direct loan is that you can receive subsidies for a short period of time, in order to reduce your monthly mortgage. The amount of your subsidy will depend on your family’s adjusted income. If you qualify for payment assistance, the interest rate on your loan can be adjusted, making it much lower than interest rates for loans obtained through conventional lenders. Furthermore, Section 502 direct loans tend to have longer repayment periods than you would receive from a traditional loan, which helps to reduce your monthly mortgage payments, further.

Eligibility Requirements for Section 502 Direct Loans

To qualify for the 502 guaranteed rural housing loan program, you must meet several different eligibility requirements. At the very least, you must be interested in obtaining a direct loan, and you must demonstrate an ability and willingness to repay your loan balance. In addition, you must:

  • Not currently have safe, sanitary or decent housing.
  • Be incapable of obtaining a loan through conventional lenders or other sources.
  • Use your new home as your primary residence.
  • Be legally capable of taking on a loan obligation.
  • Be a U.S. citizen or qualify as an eligible noncitizen.
  • Not be banned from participating in federal government programs.

Falling below the USDA direct loan income limits is equally important as meeting the requirements above. The income limits for USDA direct loans vary, depending on your family size and where you live. Each metropolitan statistical area (MSA) has its own income requirements, meaning that most regions within a state have their own limits.

The Section 502 guaranteed rural housing loan program credit score requirements are important to consider, as well. When you apply for a loan, the USDA will look at your credit from the past few years, and use your credit history to evaluate your ability and willingness to pay back debts. Learn more about how your income and credit score will affect your eligibility for this loan by downloading our detailed guide.

For what can a 502 direct loan be used?

USDA single-family direct loans can be used for a variety of purposes. You can be approved for a loan to pay for any of the following:

  • Purchasing a home.
  • Buying a building site.
  • Installing water and sewage facilities on land.
  • Renovating and repairing an existing home.

A USDA 502 loan can only be used in certain areas of the country. In general, homes in rural areas with a low population will qualify. Whether you use Section 502 direct loans for land or to purchase a house, the property will need to be within an eligible rural area.

In addition, properties must meet other criteria in order to qualify for loans from the USDA. You cannot get a Section 502 direct loan for a home that has a market value in excess of the loan limit or a home that has certain features, such as an in-ground swimming pool. Furthermore, loans can only be used for homes that fall below a maximum square footage limit. Learn more about the requirements for using a USDA loan by reading our detailed guide.

How much can you borrow with a USDA direct loan?

The amount you can receive from a Section 502 USDA direct loan varies, depending on your ability to repay debts, as well as the loan limit for the area in which you plan on living. Each county has a different loan limit that is determined by the USDA. Generally speaking, counties with higher costs of living will have higher loan limits.

When you qualify for a USDA 502 loan, you usually do not need to make a down payment, which is typically the case when you try to learn how to qualify for an FHA loan. However, if you have a lot of assets, the USDA may require you to use a portion of your assets in order to pay for your property.

Regardless of the amount you borrow, and any amount of money you may put toward a down payment, you will need to pay interest on your USDA loan. Interest varies based on the current market rates, but remember that you may qualify for a reduced interest rate if you meet the payment assistance requirements.

How to Apply for Section 502 Direct Loans

If you are interested in applying for a USDA direct loan, you will need to start by finding your local Rural Development (RD) office. Most states have their own offices, with the exception of smaller East Coast states, which tend to share regional offices with other small states.

Applications are accepted year-round. Simply contact your local RD office to obtain an application, and get started. Processing times vary, depending on how complete and accurate your form is, as well as funding availability in your area and the current demand for loans.