The first thing to know about a land loan is what a land loan actually is and how it’s different from a mortgage.
A standard mortgage is a loan from a financing institution that helps you purchase a home, but a land loan helps you buy a piece of land for the purpose of constructing something on it. Land loans can be more difficult to procure, so before you consider applying for one, it’s important to be aware of all your options. Let’s dive into the types of land loans and where you can source them so you can begin deciding which is best for you.
Finding affordable housing can be a challenge for many families, especially in rural areas where options are more limited. The USDA Rural Housing Service offers a valuable solution through its Rural Housing Site Loan program, which provides financing to develop housing sites for low- and moderate-income households. For families seeking the dream of homeownership in small towns and remote areas, USDA site loans help make it possible.
As someone who grew up in a rural town myself I understand how vital programs like USDA site loans are for expanding access to affordable housing. My goal in this article is to explain the basics of how the site loan program works and who can benefit from it. I’ll share key details on eligibility, use of funds, loan terms and how to apply. My hope is that this information will help more rural communities take advantage of this opportunity to meet local housing needs.
Overview of the USDA Rural Housing Site Loan Program
The Rural Housing Site Loan program has two main components
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Section 523 Loans – These loans provide financing to purchase and develop sites solely for self-help housing constructed by the Mutual Self-Help Housing method.
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Section 524 Loans – These loans finance the purchase and development of sites for low- or moderate-income families. There are no restrictions on the construction method.
In both cases, the loans are directed at nonprofit organizations that will develop the housing sites and provide them to eligible homebuyers. As a revolving loan fund, money repaid on the loans can be lent out again to support new projects.
Who Is Eligible to Apply?
For Section 523 self-help housing site loans, eligible applicants include:
- Private nonprofit organizations
- Public nonprofit organizations
- Tribal groups
For Section 524 site loans, eligibility is expanded to include:
- Nonprofit organizations with revolving loan fund experience
- Nonprofits with the capacity to manage the program
- Federally-recognized Tribes
In addition, the housing sites developed with Section 524 loans can be sold to families using USDA’s single family housing loans or other mortgage programs for low- and moderate-income homebuyers.
Permitted Use of Funds
Site loans provide financing to purchase land and make necessary improvements to create ready-to-build housing sites with access to water, sewer, and utilities. The sites will ultimately host affordable homes for income-qualified households.
Allowable uses of site loan funds include:
- Land acquisition
- Development costs such as water, sewer, and utility hookups
- Roads and parking areas
- Drainage and flood control
- Other expenses to prepare ready-to-build sites
Loan Terms and Conditions
Some key terms and conditions for USDA Rural Housing Site Loans include:
- 5-year loan term
- Section 523 Loans: 3% fixed interest rate
- Section 524 Loans: Below market interest rate set monthly
The revolving loan structure allows funds to be recycled as payments are made to support future site development projects for low-income housing.
How to Apply for Site Loan Funding
If you represent a nonprofit interested in creating a site development project with USDA loans, you can begin the process by contacting your local Rural Development office.
The first step is connecting with a housing program specialist who can provide guidance on the application process. They will also determine if your organization and proposed project meet the eligibility criteria.
Required documents for the application include:
- Details on the applicant organization
- Information on project costs and site development plans
- Proposed sources and uses of funds
- Ability to repay the loan
Applications can be submitted year-round, so you can inquire about funding for your affordable housing site project at any time.
Site Development Standards
While the USDA State Offices have some flexibility on loan policies, all site development work must meet the standards and requirements outlined in RD Instruction 1924 Part A and Part C related to:
- Site layout and adequacy
- Access to water, sewer, and utilities
- Environmental compliance
- Site gradings, drainage, roads, and other improvements
Following established best practices ensures the sites will be ready for home construction and safe for homeowners when completed.
Key Benefits of USDA Site Loans
As highlighted in this overview, some of the main benefits of the Rural Housing Site Loan program include:
- Expanding access to affordable housing sites for low-income rural families
- Below market-rate financing terms
- Flexible application process with year-round acceptance
- Revolving loan structure to support ongoing projects
- Partnership with experienced nonprofit developers
- Standards to ensure quality site preparation
For rural communities lacking available land for affordable homes, the site loan program provides critical funding to unlock development opportunities. Nonprofits can access the upfront capital required to secure sites and install infrastructure, reducing costs and risks for future low-income homebuilders and buyers.
Case Study: Site Loan Project Success in Appalachia
To see the real-world impacts of the USDA site loan program, we can look to a project developed by the nonprofit People Incorporated Financial Services (PIFS) in Appalachian Kentucky.
In an area struggling with a declining population and lack of housing, PIFS utilized a $300,000 Section 524 site loan to purchase 50 acres and develop 12 ready-to-build lots along with water, sewer, electric, gas, and road infrastructure. Total development costs reached $600,000.
Working with affordable homebuilder People’s Self-Help Housing, the “Hal Rogers Knob Lick Estates” site enabled 12 low-income families to build and purchase their own homes in the community through USDA 502 direct loans and sweat equity.
This project shows how nonprofits can leverage site loans to unlock new affordable housing opportunities in underserved rural regions like Appalachia. When the sites were complete, eligible buyers could step in to make the dream of homeownership a reality.
Final Thoughts
Access to affordable housing remains a challenge across much of rural America today. Through its Rural Housing Site Loan program, USDA provides an innovative model to help address this need.
If you have any other questions, don’t hesitate to contact your local Rural Development office. The knowledgeable staff can offer guidance to determine if a site loan project makes sense for your nonprofit affordable housing organization and town. Together, we can utilize this valuable USDA program to build stronger, more vibrant rural communities.
Land Loans: Trickier than Mortgages
There are a number of reasons that it’s harder to get a land loan, but these are the most common:
Difficulty reselling: If you default on your loan, it’s harder for a lender to re-sell the land. Constructing your own home or office from the ground up can be enormously rewarding because it gives you the opportunity to customize every detail of your space. But it also takes time, money, and vision, and most people in the housing market prefer to buy a home they can move into right away. Land without buildings on it can be harder to resell, so if you default, the lender might struggle to find another buyer or borrower. For this reason, down payments and interest rates for land loans tend to be higher than for mortgages.
Default risk: It’s also proven to be likelier for a borrower to default on, and walk away from, a land loan than a mortgage.1 People are evidently more likely to give up on a house that hasn’t been built yet than they are to give up on the space they consider home.
Consideration of multiple parties: Another reason it can be more difficult to procure a land loan is because the lender is not only evaluating your own track record, but also your contractor’s.2 If, for example, you’re building a commercial space and your builder doesn’t finish the job to standard, then your plans for turning a profit are in jeopardy. A lender’s concern is that in this scenario, you’d be less likely to make your loan repayments on time and in full.
3 Types of Land
Raw Land: The first type of land lenders finance is called raw land. This is undeveloped land. There’s nothing on it — no water, power, sewage, or road. Generally, it’s cheapest to purchase, but it’s worth considering that it could actually cost you more in the long run. From a lender’s perspective, developing raw land is the most challenging, and thus the riskiest, kind of building project. To get the best terms for a loan to develop raw land, you’ll need to have a strong credit history and a detailed, comprehensive, and thoughtful building plan.1
Unimproved land: The second type of land is called unimproved land. This property also lacks basic amenities, but represents a step up from raw land. It might have a road, for example, but no water and no power.
Improved land: The third type is called improved land. This is a piece of property that’s ready or nearly ready to be developed. It’s in the process of becoming construction-ready, and might have drainage, paving, or other utilities.3 It follows that this is the most expensive type of land.
Buying a House Using USDA Rural Development Loan ($1,000 DOWN)
FAQ
What is the income limit for a USDA loan in Colorado?
What is the income limit for a USDA loan in Washington state?
What are the pros and cons of a USDA loan?
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Pros
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Cons
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No down payment
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Income limits
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Competitive interest rates
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Property restrictions
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Relaxed credit requirements
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Occupancy requirements
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No PMI requirement
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USDA program fees
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What are the income requirements for a USDA loan in Florida?
What is a rural housing site loan?
Rural Housing Site Loan: Unlike the other types of USDA loans mentioned, Rural Housing Site Loans are available to private and public non-profit organizations to assist them in purchasing a site and developing housing for low- or median-income families in rural areas as a part of what’s called the Self-Help Program.
What is a USDA Rural Development Loan?
USDA loans are an attractive mortgage option for low- to medium-income homebuyers who live in rural areas and may not qualify for a conventional, FHA or VA loan. Consider a USDA rural development loan if you’re interested in buying, refinancing or renovating a home in a rural community that will be your primary residence.
What is a USDA single-family housing program?
The USDA provides several Rural Development Single-Family Housing Programs for homeowners, homebuyers and organizations. These government-backed loans, grants and loan guarantees make homeownership possible for many individuals and families. Here are the single-family housing USDA loan programs available.
How do I get a home loan with rural development?
If you would like information about obtaining a home loan with Rural Development, contact your local service center. If you have an account with us and you would like to view your mortgage account information, you must first obtain a USDA level 1 Customer ID and Password, which you can do by registering below.