What Is a Rural Development Mortgage?

A rural development mortgage is a home loan made through or guaranteed by the United States Department of Agriculture's (USDA) rural development program. The USDA acts as a direct lender for some low income borrowers, and provides security on other loans to make a lender willing to accept a borrower who might be a risk in other circumstances. There are several home ownership assistance programs run through the rural development program, including mortgages, home improvement loans, construction loans, and preservation loans.

The USDA offers a direct housing loan for borrowers with low or very low income, providing money to purchase or build a home in a rural area. A direct loan can also be used to make repairs and renovations to an existing home, or to prepare a building site. Applicants for this type of loan must not be able to get credit from other sources, but should be able to afford the mortgage payments; payment subsidies are available to some borrowers, however. Low income is defined as lower than 80% of the median income for the area, while very low income borrowers earn less than 50% of that median income.

For the guaranteed rural development mortgage, prospective homeowners must plan to use the home as their primary residence, and cannot earn more than 115% of the median income for the area. The home must be "modest," according to the USDA, and the borrowers must have good credit. They may have trouble getting a conventional loan, usually because they lack a down payment. With a rural development mortgage, they can finance 100% of the home's purchase price, and can also build in repair costs if the home needs work.

This program provides opportunities for families in need of housing who have difficulty finding it in rural areas. They may be involved in rural activities like farming and similar trades, depending on the region. With a rural development mortgage, families can access home ownership when it might otherwise be closed to them. The mortgage term is 30 years or longer, and the lender of guaranteed mortgages can set the specifics of interest and other loan terms on the basis of market conditions, the borrower's credit, and other factors. Closing costs do not have to come from the borrower's accounts, and can be a gift or grant from another source.

If purchasers are potentially eligible for a rural development mortgage, their real estate agents or mortgage brokers will often provide them with information and assistance. Lenders can also help, as they have an interest in getting the loan processed and closing the deal. Borrowers unsure about whether they qualify can do some advance research to learn more about the options and what kind of documentation they will need to provide. It is important to be aware that while the USDA backs up guaranteed loans, it cannot compel lenders to originate the loan in the first place. Lenders may decline loan applications if they have concerns about the ability to repay.

Groups of four to 12 families who want to build homes together may qualify for a different kind of rural development mortgage that offers assistance with construction costs. Additionally, repair mortgages are available to make homes safe for low income and older adults. Another type of mortgage provides funds for community organizations to assist with the costs of home preservation when homeowners cannot bear these costs themselves.