Housing advocates warn that recent changes to a federal rural lending program could sharply limit homeownership opportunities for low-income families in California communities.

The California Coalition for Rural Housing said revisions made Feb. 10 to the U.S. Department of Agriculture (USDA)’s Section 502 Direct Loan program reduce the maximum loan amount allowed under the program and eliminate certain flexibilities that previously helped borrowers qualify.

Under the new rules, the USDA revised its definition of a “modest home,” lowering the maximum loan amount tied to local Federal Housing Administration (FHA) limits. Previously, borrowers could take out up to 80% of the local FHA Section 203(b) loan limit. Under the new rule, the maximum is 60%.

A USDA spokesperson confirmed the change and offered more details in an email to HousingWire.

“USDA made these policy changes to ensure we serve more Rural Americans and keep the program strong for the long term,” the spokesperson said. “Rising loan values in recent years meant that fewer families could be assisted with the resources available. By updating the policies, we can reduce overall program costs and make room for additional loans, ultimately expanding access to the program.

“These changes also support our efforts to address increasing rates of delinquency and default. When those costs rise, they are borne by taxpayers and borrowers alike.”

The USDA Section 502 Direct Loan program, authorized under the Housing Act of 1949, allows eligible rural borrowers to obtain up to 100% financing and payment assistance to reduce monthly mortgage costs, with loan terms that can extend up to 33 or 38 years.

The program provides mortgages for low- and very low-income first-time homebuyers in eligible rural areas. It has long been a key financing tool in California, which has historically used the program more than any other state.

The California Coalition for Rural Housing, which issued a press release regarding the changes, said that many homes in California’s rural areas could be disqualified from receiving financing, even when construction and land costs fall within program guidelines.

The USDA’s updated handbook also removes exception authority that previously allowed adjustments in higher-cost markets and changes how sweat equity is treated in its Mutual Self-Help housing programs.

“Given median home values throughout California, most rural communities will now struggle to access this vital resource for preserving homeownership access, especially for low-and very low-income buyers. In many of California’s rural markets, 60% of HUD’s 203(b) limit falls well below modest home prices,” the release stated.

In response, the USDA’s spokesperson said that policy decisions, including any changes to loan limits, are reached after “careful consideration” of the impact. While “all borrowers” remain eligible for the 502 program, they said that families should consider all eligible housing options, including alternatives to new construction, that can meet their needs.

“USDA encourages states and municipalities to consider regulatory changes that prioritize home building including smaller lots, smaller scale housing, and different types of housing, as well as streamlined approval processes,” the spokesperson said.  

The agency also confirmed that some borrowers will be grandfathered under the former requirements “depending on how far along they were in the application process.” The new policy applies to all new funding commitments going forward, and borrowers should contact their local USDA office to determined the status of their application.

The coalition’s release quoted Tom Collishaw, president and CEO of Self-Help Enterprises. “With no warning or stakeholder input, USDA has closed access to a federal program that has been a vital gateway to homeownership for thousands of low-income families in California and beyond.”

Rural housing organizations say the program has been especially important in regions recovering from disasters or facing severe housing shortages.

The coalition also quoted Seana O’Shaughnessy, president and CEO of the Community Housing Improvement Program, who said the organization has helped create homeownership opportunities for more than 250 families through the USDA program since the 2018 Camp Fire. The new rules, she said, mean the nonprofit can no longer build homes that meet the community’s needs.

More than 2 million people live in rural areas across California, according to housing advocates, and many communities are experiencing population growth and rising housing costs.

The coalition said the changes could also affect state housing initiatives that rely on the federal loans, including disaster recovery housing programs and farmworker housing initiatives that assume higher federal loan capacity.

Editor’s note: This story was updated with comments from the USDA.

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