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  • The Center for Rural Homelessness

What is the USDA Section 538 Program?

By: Katie Baughman, Policy Intern


OVERVIEW

Section 538 of the Housing Act of 1949, also called the Guaranteed Rural Rental Housing program, is a United States Department of Agriculture (USDA)-funded federal program that guarantees loans to rural housing developers. Section 538 loans are not direct loans, but guarantees placed onto commercial loans from qualified lenders, who then provide their own loans to housing developers. The USDA guarantees up to 90% of the development cost or property value for rental housing developments. Loans have terms for up to 40 years. This aims to allow private lenders security in rural housing investments, as loans are made secure for lenders; they also allow lenders to exceed typical credit limits for unguaranteed loans, which is often necessary to fully fund development.


Properties backed by Section 538 are required to be five units or more of affordable housing, with units’ rents capped at 30% of 115% of the area’s median income (AMI). Section 538 also gives priority to developments in smaller rural communities and on tribal lands. Funding can be used for the development, land acquisition, or rehabilitation of multi-family rental housing. The program is active in 49 states. It is typically combined with other low-income housing subsidies, such as the Low-Income Housing Tax Credit (LIHTC). Section 538 was put into practice in 1998, and since then has supported the creation of over 51,000 rental units across rural communities. 


HOW DOES THIS AFFECT RURAL AREAS?


With dispersed populations and aging housing infrastructure, many rural communities have limited access to affordable rental housing. Section 538 of the USDA, designed specifically to increase rental housing in rural communities, is then a unique benefit to low-income and very low-income families. Section 538 is a key financing source for the development of rural affordable housing rentals. Section 538 also uniquely incentivizes the development of affordable rental housing in remote and very small rural towns, which are otherwise often hard to secure backing for. Nearly ¼ of Section 538 properties are located in rural communities with populations under 2,500. Section 538 backing, then, incentivizes more rental housing developments in rural areas, often the only accessible short-term housing in their areas. Section 538 further continues to expand as a program, receiving nearly double its congressional allegations since 2012.

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