How Banks Can Expand Their Reach with USDA’s Rural Housing Programs

Created in 1963, USDA’s mutual self-help program has been training income-eligible participants to build or rehabilitate their own homes for over 40 years. Sponsoring nonprofit housing organizations provide supervision and training. Families contribute about 65 percent of the labor needed. They work in groups, and no family moves into its new home until all of the houses in the group have been completed. Their “sweat equity” reduces the cost of the home and serves as their downpayments. Loans to purchase the home are provided under USDA’s section 502 loan program at a below-market interest rate. Sometimes a direct 502 loan is combined with a loan from a bank to make funds available to a prospective homebuyer (called “leveraged loans”). Leveraged loans benefit participating banks because they obtain first lien position, which can reduce the risk of loss in the event of default. Leveraged loans can also be sold to Fannie Mae and Freddie Mac in the secondary markets. Community Reinvestment Act credit may be available to lenders offering “leveraged loans” in conjunction with the USDA 502 loan program. For details see: http://www.rurdev.usda.gov/wy/rhs.htm