What is an RHS Loan?
An RHS loan is a type of financing made by or guaranteed by the United States Department of Agriculture Rural Housing Service (RHS). The RHS lends directly to low-income borrowers in rural areas and also guarantees loans that meet RHS requirements made by approved lenders. RHS mortgage loans may be part of a pool of mortgages securitized by the Government National Mortgage Association (GNMA, more commonly referred to as Ginnie Mae), which is a government corporation within the U.S. Department of Housing and Urban Development.
The RHS originates and guarantees more than home mortgages. The RHS operates loan programs for community services such as healthcare clinics, police and fire stations, schools, and childcare centers—and for things like first-responder vehicles and equipment.
How an RHS Loan Works
There are different types of loan programs available through the USDA's RHS, each with its own requirements for applicants and lenders.
Single Family Housing Direct Home Loans
Single family direct housing loans are for families in low- to very-low–income brackets and are designed to help these families secure safe, sanitary, and decent housing that they could not procure on their own. A borrower who wants to buy a home and who might not qualify for a traditional mortgage because of low income or problematic credit history may have an improved chance applying for an RHS single family direct home loan.
[Important: An RHS loan can help a borrower who otherwise might not quality for a traditional mortgage because of low income or bad credit to buy a home in an approved rural area.]
To be eligible for the loan, the borrower must not be able to obtain a loan from another source. The family’s income must not exceed the limits set for their respective area. In addition, the residence must in general measure 2,000 square feet or less, not have a market value that exceeds the loan limit for the area, not have an in-ground swimming pool, and not be designed for commercial activities. The residence must also be located in an approved area.
With an RHS loan, a down payment might not be required on the house; however, the borrower must still be able to pay the mortgage payments, taxes, and insurance. The home the mortgage is being used for must be the intended primary residence of the borrower. The cost of required repairs could be included in the mortgage amount.
Other Types of RHS Loan Programs
The single family housing guaranteed loan program helps approved lenders provide the opportunity to own decent housing. Borrowers can be of low to moderate income. Approved borrowers can build, rehabilitate, improve, or relocate a residence in an eligible rural area. Other requirements apply.
The RHS also offers loan programs for multifamily rental housing in rural areas. These programs finance projects designed for low-income, elderly, and disabled individuals and families and for domestic farm workers.
Critics of the RHS’s programs have called for an end to its loan service, recommending instead that a free market would serve lower-income families looking for way to buy a home of their own.