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V. VARIATIONS OF THE SECTION 502 LOAN PROGRAM There are several variations of the basic Section 502 loan program. These include mutual self-help housing, condominium housing, community land trusts, manufactured housing, and the rural housing disaster loan program. A. Mutual Self-Help Housing Loans Groups of families unable to obtain decent, safe and sanitary housing through conventional methods because of limited income may construct their homes by participating in a mutual self-help housing project. Participating families perform a substantial amount (approximately 65 percent) of the construction labor on each other’s homes, under qualified supervision. Normally, self-help groups range from six to twelve families. The savings from reduction in labor costs may allow otherwise ineligible families to own homes. RHS provides Section 502 loan funds to individual families participating in the mutual self-help program. If the families cannot meet their mortgage payments during the construction phase, the funds for those payments can be included in the loan. RHS requires that families participating in a self-help project form an association that will hold meetings to familiarize its members with the self-help process and construction techniques. Also, association members sign an agreement stating when the families will be available to work, the amount of work to be performed, the number of persons to be involved in each work group, and the amount of time each will spending working on the houses. Through its Section 523 technical assistance grant program, RHS can provide administrative funding for sponsors to organize families, supervise construction and generally administer the program. RHS can also make 3 percent loans for purchase and development of sites for self-help housing. RHS currently supplies 75 percent of each individual family’s Section 502 loan funds from national reserves. The balance is funded from the state allocation. RHS contracts with four regional organizations to provide technical assistance to organizations sponsoring self-help housing. They are:
In 1991 FmHA released a two-part handbook on the self-help program. Organizations serious about self-help can gain access to the handbook through the regional contractors, Rural Development, or RHS. B. Deferred Mortgage Payment Demonstration RHS may defer up to 25 percent of the mortgage payment to make loans feasible for very low-income applicant/borrowers, but this Deferred Mortgage Payment program is not currently funded. The test is the family’s ability to repay principal, interest, taxes and insurance (PITI) on a 1 percent 38-year loan within 29 percent of gross income. The need for an amount of deferred payment assistance is reexamined annually. It can be provided annually for a 15-year period. Deferred principal accrues interest at 1 percent. Deferred interest does not accrue interest. For example, the program would work as follows for a $60,000 mortgage:
Actual funding for deferred payment mortgages is limited by congressional appropriation. C. Manufactured Housing Two types of manufactured housing are financed by RHS. One type is housing that meets one of the model building codes and CABO Model Energy Code, 1992 Edition (MEC-92) (often delivered in panels, modules or sections). The other is housing that meets the Federal Manufactured Home Construction and Safety Standards (FMHCSS) and the MEC-92. The former is treated like other stick-built housing. Requirements for the latter, sometimes referred to as mobile homes or trailers, are found in Exhibit F to Instruction 1944-A and include the following:
D. Section 502 Guaranteed Loans RHS has a separately funded guaranteed loan program which operates through approved lenders. It is authorized as both a subsidized and unsubsidized program, but is currently limited by appropriations law to unsubsidized. There are a number of basic differences between this program and the standard Section 502 program, some of which are outlined below.
E. Loans for Condominiums and in Community Land Trusts RHS has established special criteria for condominiums and community land trusts. See 3550.71 (condominiums) and 3550.72 (community land trusts). Also see Appendix 20 in this guide. F. Housing Demonstration Program Up to $10 million can be used annually to finance dwellings that do not meet RHS requirements, providing they are within the law and the dwellings do not pose a threat to health or safety. RHS publishes an administrative notice annually (usually in December or January) which outlines the procedure for accessing demonstration funds. Approval for demonstration projects is made in the National Office. G. Participation Loans RHS actively encourages borrowers to combine their Section 502 loans with other financing sources, called participation lenders. The practice is intended to allow RHS to make more loans. Participation lenders utilize their own criteria and forms and are provided a first mortgage position. The resulting blended interest rate is higher than the subsidized RHS interest rate and means higher incomes will be served. Participation lending does not work well for very low-income applicants. H. Exception Authority Loans can be made for purposes not permitted by Part 3550 when RHS determines that not to do so would adversely affect the government’s interest and the exception does not conflict with the law. Exceptions must be initiated by a Rural Development State Director or RHS Deputy Administrator (Housing), and are approved by the RHS Administrator or his/her designee (see 3550.8 and I.12 in HB-1-3550).
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