USDA Section 538 loan terms for 2026: loan-to-cost, DSCR, fees, term

A Section 538 loan is a private lender’s fixed-rate loan on rural rental housing with a USDA guarantee of up to 90%. Borrower and lender negotiate the rate and the lender underwrites the deal; USDA approves the guarantee and caps the loan size.

How big the loan can be

The loan can’t exceed the lesser of a percentage of development cost and a percentage of the lender’s value (no higher than the appraisal). That percentage is 90% for a for-profit borrower and 97% for a nonprofit or a state, local or tribal government borrower (7 CFR 3565.204). For the residential part of the property, the loan also can’t exceed HUD’s section 207(c) per-unit limits.

USDA offers three guarantee structures (7 CFR 3565.52): Option 1 guarantees the permanent loan only, Option 2 guarantees construction advances and then the permanent loan, and Option 3, the continuous guarantee, covers both under one guarantee for deals with lower loan-to-cost. USDA raised its loan-to-cost cap from 70% to 80% of total development cost in a September 25, 2026 notice (91 FR 60930).

Term, amortization and rate

Terms run 25 to 40 years, with amortization up to 40 and a balloon allowed at maturity (7 CFR 3565.209). The rate is whatever borrower and lender agree, fixed for the term, and no higher than USDA’s maximum allowable rate (3565.210). There’s no interest credit: USDA’s 2024 process notice says so outright, and the fiscal 2026 appropriations act (Public Law 119-37) says the interest on these loans may not be subsidized.

Coverage

Before USDA issues the permanent guarantee, the lender certifies that cash flow meets a debt service coverage ratio of at least 1.15 (7 CFR 3565.303). Under USDA’s Multifamily Housing Preservation Pilot, which runs from October 9, 2026 to September 25, 2028, the first 200 Section 538 loans closed need only 1.11, and USDA may approve lower. The same pilot caps the developer fee at 15% of total development cost when no tax credit or other government program funds it.

Fees

USDA’s notice of September 30, 2026 (91 FR 61820) sets:

Category	Initial fee	Annual fee
Standard	65 bp	35 bp
Workforce housing, rents between 80% and 115% of AMI	60 bp	25 bp
Preservation of existing Section 515 or 514/516 properties	60 bp	25 bp
New construction or substantial rehab in a Qualified Opportunity Zone	60 bp	25 bp

The Opportunity Zone category replaced the old “Green” category. The initial fee is charged on the guaranteed amount, so a $6,000,000 loan with a 90% guarantee pays 65 bp on $5,400,000, or $35,100. The annual fee is charged on the outstanding principal at December 31 and paid in advance: $21,000 in the first year at 35 bp. There’s no application fee (89 FR 104031).

Tenants and rents

Tenants may earn up to 115% of area median income at move-in, and their income can rise later without forcing them out (7 CFR 3565.202). Each unit’s rent, utilities included, is capped at 30% of 115% of AMI adjusted for family size, and the project’s average rent at 30% of 100% of AMI (3565.203). The housing must stay available to low and moderate income households for the original term of the loan, through a deed restriction (7 CFR 3565.352). Find the limit for your area on the income limits pages.

Funding and timing

Fiscal 2026 funded $400 million of 538 guarantees (Public Law 119-37). There’s no annual round: USDA accepts complete applications from approved lenders year-round and says it notifies the lender generally within 30 days of receiving a complete application. It scores applications only when money runs short.

Plug your deal into the 538 loan sizer, which applies the loan-to-cost cap, the DSCR test and these fees.