Rural Housing Direct Loans are loans that are directly funded by the Government.   These loans are available for low- and very low-income households to obtain homeownership.  Applicants may obtain 100% financing to purchase an existing dwelling, purchase a site and construct a dwelling, or purchase newly constructed dwellings located in rural areas.  The purpose of this loan is to provide financing at reasonable rates and terms with no down-payment.  Mortgage payments are based on the household's adjusted income.  These loans are commonly referred to as Section 502 Direct Loans.

Purpose: Section 502 loans are primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities.

Eligibility: Applicants for direct loans from RHS must have very low or low incomes.   Very low income is defined as below 50 percent of the area median income (AMI); low income is between 50 and 80 percent of AMI; moderate income is 80 to 100 percent of AMI.   Area income limits for this program are here.

Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance. These payments are typically within 22 to 26 percent of an applicant's income. In addition, applicants must be unable to obtain credit elsewhere, yet have reasonable credit histories. Elderly and disabled persons applying for the program may have incomes up to 80 percent of area median income (AMI).

Terms: Loans are for up to 33 years (38 for those with incomes below 60 percent of AMI and who cannot afford 33-year terms). The term is 30 years for manufactured homes. The promissory note interest rate is set by RHS, and in July 1999 it was 7.25%. However, that interest rate is modified by payment assistance subsidy.

The interest rate and amount of subsidy are determined by family income as percentage of AMI so that a family pays from 22 to 26 percent of their income for principal, interest, taxes, and insurance (PITI) up to an amount not exceeding the promissory note rate.

There is no required down payment. RHS must also determine repayment feasibility, using ratios of repayment (gross) income to PITI and to total family debt.

Standards: Under the Section 502 program, housing must be modest in size, design, and cost. Modest housing is generally defined as housing costing less than the HUD Section 203 (b) loan limits as of 9/30/98. Houses constructed, purchased, or rehabilitated must meet the voluntary national model building code adopted by the state and RHS thermal and site standards. Manufactured housing must be permanently installed and meet the HUD Manufactured Housing Construction and Safety Standards and RHS thermal and site standards.

Approval: Rural Development officials have the authority to approve most Section 502 loan requests. Decisions on complete applications are generally made within 30 days of the Rural Development office's receipt of the application.

Basic Instruction:7 CFR Part 3550 and HB2-3550