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USDA Rural Housing Service Overhauls Section 538 Guaranteed Loan Terms and Launches Multifamily Preservation Pilot

The Rural Housing Service is simultaneously launching a two-year Multifamily Housing Preservation Pilot and revising guarantee fees and loan-to-cost limits for its Section 538 program to accelerate preservation of affordable rural rental housing.

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Multifamily Housing Preservation Pilot

The USDA's Rural Housing Service (RHS) has issued a notice implementing a Multifamily Housing (MFH) Preservation Pilot that will begin on October 9, 2026 and continue until September 25, 2028. The Pilot covers three distinct areas of action: programmatic variations to the MFH Rural Rental Housing Loan (MFH Section 515) and the MFH Section 538 Guaranteed Rural Rental Housing Program (MFH Section 538) involving transfers; MFH Section 515 transfers utilizing Low Income Housing Tax Credits (LIHTC); and variations specific to MFH Section 538 for the first 200 transactions.

The Pilot addresses three types of preservation-related transfers: MFH Section 515 ownership transfers that do not fall within the Simple Transfer Pilot; MFH Section 515 ownership transfers involving LIHTC; and MFH Section 538 transactions regardless of whether a transfer is involved, up to the first 200 guaranteed loans. For the MFH Section 538 program, the Pilot also includes a debt service coverage ratio (DSCR) change, among other variations, applicable to those first 200 guaranteed loans.

According to the notice, the Agency will use the Pilot to determine whether it can improve program delivery efficiency for transactions that facilitate preservation of low-income housing units in rural America while maintaining appropriate risk management of the portfolio. The notice states that MFH portfolio assets are aging and face significant delays and regulatory hurdles for transfers that significantly impact the assets' long-term viability and overall portfolio risk — a burden borne not only by the Agency but especially by the rural population who reside in these assets. While the Pilot is active, the Agency states it will evaluate the Pilot's progress and identify opportunities to improve regulations, remove regulatory barriers, and reduce duplicative application requirements.

Loan-to-Cost Percentage Change for Section 538 Option 3

Separately — and explicitly outside the scope of the Pilot — RHS is changing the maximum loan-to-cost percentage for loans guaranteed under MFH Section 538's Option 3 (Continuous Guarantee) from 70 percent to 80 percent. The notice states that the Agency is aligning with other federal agencies and the market to ensure demand for the guaranteed loans used for preservation and production of affordable, decent, safe, and sanitary rural rental housing. This change applies only to Option 3 (Continuous Guarantee) and is not part of the Preservation Pilot.

Revised Guarantee Fees for Section 538

In a related action effective September 30, 2026, RHS announced a revision to the current fee structure for the Section 538 Guaranteed Rural Rental Housing Program's initial and annual guarantee fees. This notice affects the same Section 538 program covered by the Pilot and the loan-to-cost change, though it is published as a separate action.

What to watch

  • October 9, 2026: The MFH Preservation Pilot begins.
  • September 25, 2028: The MFH Preservation Pilot is scheduled to conclude.
  • September 30, 2026: The revised Section 538 initial and annual guarantee fees take effect.

What this means for recipients

State, local, and tribal governments, as well as consultants serving them, should note that the MFH Preservation Pilot introduces programmatic variations to both the Section 515 and Section 538 programs — including LIHTC-related transfer provisions and DSCR changes — that apply beginning October 9, 2026 and govern transactions through September 25, 2028. The increase in the maximum loan-to-cost percentage under Section 538 Option 3 (Continuous Guarantee) from 70 percent to 80 percent takes effect independently of the Pilot and may affect financing terms for preservation and production projects. The revised initial and annual guarantee fees for Section 538 are effective September 30, 2026, and entities with pending or planned guaranteed loan applications should account for the updated fee structure.

Related

Sources

12 cited

Every hard fact above is grounded in and cited to a primary source record.

  1. The Multifamily Housing Preservation Pilot will begin on October 9, 2026 and continues until September 25, 2028.

    federalregister.gov

  2. The Pilot covers three areas: MFH Section 515 and Section 538 programmatic variations involving transfers; MFH Section 515 transfers utilizing Low Income Housing Tax Credits (LIHTC); and variations specific to MFH Section 538 for the first 200 transactions.

    federalregister.gov

  3. The Pilot addresses MFH Section 515 ownership transfers that do not fall within the Simple Transfer Pilot; MFH Section 515 ownership transfers involving LIHTC; and MFH Section 538 transactions regardless of whether a transfer is involved, up to the first 200 guaranteed loans.

    federalregister.gov

  4. The Pilot includes a DSCR change for the MFH Section 538 program, among other variations, applicable to the first 200 guaranteed loans.

    federalregister.gov

  5. The Agency states it will use the Pilot to determine if it can improve program delivery efficiency for transactions that facilitate preservation of low-income housing units in rural America while maintaining appropriate risk management of the portfolio.

    federalregister.gov

  6. The notice states that MFH portfolio assets are aging and face significant delays and regulatory hurdles for transfers that significantly impact the assets' long-term viability and overall portfolio risk.

    federalregister.gov

  7. While the Pilot is active, the Agency will evaluate the Pilot's progress and identify opportunities to improve regulations, remove regulatory barriers, and reduce duplicative application requirements.

    federalregister.gov

  8. The maximum loan-to-cost percentage for loans guaranteed under MFH Section 538 Option 3 (Continuous Guarantee) is being changed from 70 percent to 80 percent.

    federalregister.gov

  9. The loan-to-cost percentage change applies only to Option 3 (Continuous Guarantee) and is not part of the Pilot.

    federalregister.gov

  10. The Agency states it is aligning with other federal agencies and the market to ensure demand for the guaranteed loans used for preservation and production of affordable, decent, safe and sanitary rural rental housing.

    federalregister.gov

  11. RHS announced a revision to the current fee structure for the Section 538 Guaranteed Rural Rental Housing Program initial and annual guarantee fees.

    federalregister.gov

  12. The effective date of the revised Section 538 initial and annual guarantee fees is September 30, 2026.

    federalregister.gov

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