USDA 538 Loan Program

Commercial Real Estate Loans specializes in arranging USDA 538 loans for affordable rental housing developments in qualified rural submarkets. We carefully walk the developer through the NOFA application process and have deep experience working through the USDA application and commitment process. 

What Is a USDA 538 Loan?

The USDA 538 Loan Program is a government-guaranteed loan available to developers of multifamily housing in rural areas. To qualify, multifamily housing projects must be intended for low- and moderate-income families. Under the program, Commercial Real Estate Loans underwrites the loan. The USDA then provides a guarantee of up to 90% that covers the loan.

Who Qualifies for a USDA 538 Loan?

As specified by regulation, the guaranteed loan facility may be accessed by the following entities:

• For-profit organizations, including LLCs

• Not-for-profit organizations

• Federally recognized tribes

• State and local government agencies

• Individuals

USDA 538 Loan Application Process

The application for a rural housing loan requires the developer to submit the following:

• Documents to prove legal entity status, e.g., corporate documents and partnership agreements

• Financial statements

• Credit score

• Project information including market studies, location, site plans, budget, pro forma, etc.

Each year, the USDA publishes a NOFA (Notice Of Funding Availability), which states the amount of funding and the period for which it is available. Commercial Real Estate Loans will handle the paperwork for the developer and hand in a response to the NOFA.

Once the Department of Agriculture ensures that everything is in order and valid, it then processes the application. Before moving forward on a USDA 538 loan, the USDA will ensure that:

• The developer is a qualifying entity

• The developer has complied with all federal and state regulations

• The intended project qualifies for a USDA 538 loan

• The project is in an eligible area

• The project is feasible and the developer has the ability to complete it

• The application is in line with the NOFA requirements

If the application is approved, the USDA issues a Notice to Proceed. After this, a meeting is scheduled between the USDA, Commercial Real Estate.Loans, and the developer. The meeting is mostly procedural and involves reviewing the plans. 

Each NOFA states if there is an applicable interest credit. The interest is accrued and paid on Jan. 1 on a recurring basis. The amount of interest credit depends on the demand. If demand is high, then the projects with the lowest-interest credit request will get priority. In the event of substantial demand for interest credit, the projects that can demonstrate that an interest credit will yield lower rent or high service levels for tenants will get preference.  

The USDA may decide to limit the amount of interest credit for each project. For highly ranked projects it is possible to have two guaranteed parity loans: one with tax credit and one without. 

Use of USDA 538 Loan Proceeds

According to the standards and conditions of 7 CFR part 1924, subpart A or successor provisions, a USDA 538 loan facility may be used for the following purposes as it relates to multifamily housing in qualifying markets: 

• New multifamily construction

• Moderate or substantial rehabilitation of apartment buildings and acquisition costs when related to the rehabilitation of a building

• Acquisition of existing buildings, when approved by the agency, for projects that serve a special housing need. For example, the acquisition and improvement of land on which housing will be located

• Development of on-site and off-site improvements essential to the use of the property

• Development of related facilities such as amenities, community space, recreation, storage, or maintenance structures

• Construction of on-site management or maintenance offices and living quarters for operating personnel for the property

• Purchase and installation of appliances and certain approved decorating items, such as blinds, shades, or wallpaper

• Development of the surrounding grounds, including parking, signs, landscaping, and fencing

• Costs associated with commercial space provided that:

  • The project is designed primarily for residential use

  • The commercial use consists of essential tenant service-type facilities, such as laundry rooms, that are not otherwise conveniently available

  • The commercial space does not exceed 10 percent of the gross floor area of the residential units and common areas

• Costs for feasibility determination, loan application fees, appraisals, environmental documentation, professional fees, or other fees determined to be necessary to the development of the project

• Technical assistance to and by nonprofit entities to assist in the formation, development, and packaging of a project, or formation or incorporation of a borrower entity

• Education programs for a board of directors, both before and after incorporation of a cooperative that will serve as the borrower

• Interest accrued on the multifamily construction loan

• Relocation assistance in the case of rehabilitation projects

• Developer fees

• Repaying applicant debts in the following cases:

  • When the agency authorizes in writing in advance the use of the loan to pay debts for work, materials, land purchase, or other fees and charges before the loan is closed

  • When the agency agrees with a determination by the lender that costs for work, fees, and charges incurred prior to loan application are integral to the development of the guarantee application and project

Over the years, Commercial Real Estate.Loans has advised developers on which loan option is best for the project at hand and accumulated the experience and skills to help developers navigate the requirements of the USDA 538 loan program, as stated in the Federal Register, including occupancy terms, O&M reserve requirements, surety requirements, and more.

2023 USDA 538 Loan Terms

A USDA Rural Development Loan May Be Issued in One of Three Ways

Permanent guarantee loan with up to 90% LTV

The guarantee will be up to 90%, unless stated otherwise by the NOFA, of the remaining principal and interest. (Maximum 70% loan-to-cost)

Guaranteed advancement loan during construction, possibly with a permanent loan

This facility is available only for the duration of the construction. The maximum guarantee of construction advances related to construction and permanent loans will not at any time exceed the lesser of 90% (unless stated otherwise through a NOFA) of the amount of principal and accrued interest or 90% of the original principal amount and accrued interest as a continuous guarantee for construction and permanent loans. This option is available to projects with low loan-to-cost ratios.

Single, continuous guarantee for construction and permanent loan

Only projects that have low loan-to-cost ratios, as stated in a NOFA, are eligible for this type of guarantee. A construction contingency reserve is required. The developer may also be required to establish a lease-up reserve, in an amount stated in a NOFA, that is set aside prior to closing the construction loan. The guarantee covers 90% of the loan amount unless otherwise stated by NOFA.

USDA 538 Multifamily Loan Pros

• The USDA provides guarantees for up to 90%. This lowers the risks of building in rural areas and maximizes returns.

• State and local government entities, non-profits, and federally approved tribes can get guarantees of up to 97%.

• Loans up to 40 years

• No limit on how much a borrower can request, bearing in mind market size and capacity.

• Interest rates are fixed throughout the term.

USDA 538 Multifamily Loan Cons

The USDA 538 loan process can feel tedious and difficult without proper guidance from an experienced lender or intermediary. The USDA 538 Loan Program may not be used for:

• Student housing

• Housing in military-impacted areas

• Cooperative housing

• Medical care facilities

• Payment of fees, salaries, and commissions or compensation to borrowers, with the exception of developer fees

• Refinancing of outstanding debt, except in the case of an existing GRRHP guaranteed loan. The term and amount of any refinanced loan must not exceed the maximum loan amount or term limits.

USDA 538 Housing and Tenant Profile Requirements

USDA 538 Intended Tenant Profile

Housing properties under the USDA 538 loan platform must have the following restrictions, which must also be explicitly recorded in the deed:

• The occupants of the multifamily homes must have an income below 115% of AMI, adjusted for family size.

• The tenant may be an individual or a family.

• The rent charged for each unit will be capped at 30% of 115% of the AMI after it has been adjusted for family size. HUD offers a guide to fair market rent for areas around the country, or you can determine your area's below.

In addition, the USDA provides a chart of the AMIs for any specific address across the U.S.

USDA 538 Housing Profile

The intended multifamily property must satisfy the following criteria in order to qualify:

• Must be in a rural area or town, with a population not larger than 35,000, or on tribal land. The USDA has created an interactive map of locations that qualify.

• Must consist of at least five units

• Must be located within reasonable distance to essential services such as hospitals, schools, shopping centers, etc.

• The property may not be used to house students or certain categories of migrants

• The property may not be used as a health care facility

Multifamily housing under the USDA 538 loan program must ultimately bring dignity to its residents while serving as a solid investment for all parties involved. For this reason, the site must be located in a desirable and convenient location that would in no way reduce the quality of life for its tenants. Examples of such nuisances and/or health risks include but are not limited to:

• Sites adjacent to train tracks

• Sites with environmental concerns

• Industrial areas

• Declining neighborhoods

• Sites near manufactured housing communities

• Sites with poor sewage systems

We'll walk you through your options and provide you with the best quotes for your situation, whether it's through the USDA 538 multifamily loans program or another option.

Get a quote by filling out the form below.