USDA Section 538 loans are part of the U.S. Department of Agriculture’s Rural Development program aimed at supporting the construction, renovation and preservation of affordable rental housing in rural areas. This loan program is specifically designed for developers and builders, encouraging the creation of multifamily housing for low- to moderate-income households. 

Here are some key points about USDA Section 538 loans: 

  • Purpose: The loans are used to finance the construction, rehabilitation or acquisition of affordable multifamily rental housing in rural areas. 
  • Eligible Borrowers: Nonprofits, for-profit developers, state and local governments or tribal entities are eligible to apply. The property financed must remain affordable to low- and moderate-income households. 
  • Guaranteed Loans: The USDA provides a loan guarantee (rather than direct loans), which means private lenders make the loan and the USDA guarantees a portion of it, reducing the lender’s risk. 
  • Interest Rates: The interest rates for Section 538 loans are negotiated between the lender and the borrower but must be fixed and comparable to current market rates. The USDA guarantees up to 90 percent of the loan, which may result in more favorable rates for borrowers. 
  • Term and Repayment: The maximum loan term is 40 years, providing long-term financing options for developers. 
  • Rural Focus: The property must be in a rural area, defined by the USDA as areas with populations of less than 35,000. 
  • Affordability: At least 40 percent of the units must be set aside for low- or moderate-income tenants, defined as those earning 115 percent or less of the area median income. 
  • The USDA Section 538 loan program supports the development of housing in areas that might otherwise be underserved by private financing, promoting economic development and providing affordable rental housing options in rural communities. 

Applications are accepted on a rolling basis and the application process consists of submitting a pre-application to a USDA-approved lender, USDA’s review of the application, submission of a full application, followed by approval and loan closing. Developers looking to apply for a Section 538 loan should contact a USDA-approved lender. Approved lenders can be found by state here on the USDA Rural Development website.