The United States Department of Agriculture's (USDA) Rural Housing Service (RHS) has announced two significant actions aimed at strengthening the landscape of affordable housing in rural America. Published in the Federal Register, these initiatives include the launch of a Multifamily Housing (MFH) Preservation Pilot program and a distinct adjustment to the loan-to-cost percentage for its Section 538 Guaranteed Rural Rental Housing Program. These measures directly address the pressing need to preserve and revitalize the nation's aging inventory of rural rental housing, critical for low-income households across the country.
The Multifamily Housing Preservation Pilot: Streamlining Transfers and Reducing Hurdles
The centerpiece of the RHS's new strategy is the MFH Preservation Pilot, set to run from October 9, 2026, until September 25, 2028. This two-year initiative seeks to improve the efficiency of program delivery for transactions that facilitate the preservation of low-income housing units in rural areas, while simultaneously maintaining robust risk management of the RHS portfolio. The Pilot will evaluate its own progress to identify opportunities for regulatory improvements, the removal of barriers, and the reduction of duplicative application requirements.
The Pilot encompasses three main components. It will introduce programmatic variations for MFH Rural Rental Housing Loan (Section 515) and MFH Section 538 transfers, specifically targeting ownership transfers that do not fall under the existing Simple Transfer Pilot. It will also address Section 515 ownership transfers involving Low Income Housing Tax Credits (LIHTC), a common financing tool for affordable housing. Finally, the Pilot includes variations specific to the Section 538 program for its first 200 guaranteed loans, irrespective of whether a transfer is involved, and introduces a change to the Debt Service Coverage Ratio (DSCR) within the Section 538 program for these initial transactions.
The agency emphasizes that these specific actions are crucial for preserving assets within the MFH portfolio. Many properties are aging and face significant delays and regulatory hurdles during transfers, which impact their long-term viability and overall portfolio risk. The RHS aims to ensure that the agency, property owners, and residents do not continue to struggle with government regulations that slow the preservation of affordable, decent, safe, and sanitary rural rental housing.
Background and Stakeholder Engagement
For over 60 years, the MFH Programs have provided affordable rental housing in rural communities, with approximately 400,000 units in the portfolio, 95 percent of which are Section 515 properties. The agency increasingly relies on third-party financed preservation efforts, often paired with ownership transfers, to sustain the portfolio. However, current transfer approval and closing timeframes frequently exceed those of third-party lenders, jeopardizing transactions.
The new Pilot builds upon the success of the 2022 Simple Transfer Pilot, which focused on ownership transfers without third-party financing. Extensive engagement with stakeholders revealed common challenges, including a lack of clarity in agency requirements, inconsistencies in reviews, and duplicative application processes. These issues largely overlap with those encountered in mixed-finance transactions involving Department of Housing and Urban Development (HUD) programs, leading the RHS to explore targeted alignment to reduce burdens and improve preservation outcomes.
Key Adjustments Under the Pilot
To address identified inefficiencies, the Pilot will implement several procedural changes:
Third-Party Appraisal Report Requirement Flexibility for MFH Section 515
The RHS recognizes that current appraisal requirements add significant time and expense to transfer transactions. Under the Pilot, the agency may expedite appraisal reviews by temporarily waiving the requirement for a technical review by an agency appraiser. Such reviews will only be conducted when deemed necessary to protect the government's interest, such as when appraisals identify significant rent increases for comparable units or substantial building costs relative to the market. The agency will also expand situations where an appraisal is not required if the RHS holds the first lien position and the total value of assumed loans is 50 percent or less of the property's current value, as reflected in tax records or other approved documentation.
Streamlined Processing Authority for MFH Section 515 and MFH Section 538 Low Risk Transfers
For low-risk transfer applications, the agency may now rely on qualified lenders, nonprofit preservation partners, or other approved participants to process applications using agency-approved templates, certifications, and checklists. The RHS retains the final determination on all transfer applications and may suspend or revoke this authority if performance, compliance, or risk concerns arise.
Credit Report Submission Requirements for MFH Section 515 and MFH Section 538
The notice clarifies that Section 515 applicants must submit a current comprehensive credit report (within six months) for the entity, general partner or managing member, and all controlling sub-entities or natural persons. Accepted reports can come from Experian, Equifax, TransUnion, or Dun & Bradstreet. For Section 538 applicants, current requirements remain in place, necessitating credit reports for the borrower and any individual holding more than a 25 percent financial interest in the property. Newly formed organizations must provide reports for principal members, stockholders, or partners with at least a 25 percent ownership interest.
Loan-to-Cost Percentage Change for Section 538 Guaranteed Loans
Separate from the Pilot, but announced concurrently, the RHS is modifying the maximum loan-to-cost percentage for its MFH Section 538 Guaranteed Rural Rental Housing Program, specifically for Option 3 (Continuous Guarantee). This action increases the maximum loan-to-cost percentage from 70 percent to 80 percent of the total development cost. The agency's objective is to align with other federal agencies and market standards, thereby ensuring sufficient demand for guaranteed loans used in the preservation and production of affordable, decent, safe, and sanitary rural rental housing. This change is anticipated to increase the number of preservation and production applications.
These combined initiatives underscore the Rural Housing Service's commitment to proactively address the challenges facing affordable housing in rural communities. The Pilot represents a concentrated effort to test and refine existing processes, while the loan-to-cost adjustment provides a more direct financial incentive for development and preservation activities. Both actions aim to foster a more responsive and efficient system for maintaining vital affordable housing stock.
