What This Program Offers Rural Homebuyers
The Home Possible mortgage with RHS Leveraged Second combines two government-backed programs to help moderate-income buyers purchase homes in rural areas. You get a conventional first mortgage through the Home Possible program plus a subsidized second mortgage from USDA Rural Housing Service.
This structure lets you finance up to 95% of the home's value while keeping your first mortgage at just 50% loan-to-value. The remaining 45% comes from the USDA second mortgage, which typically offers below-market interest rates and deferred payment features.
Say you're buying a $200,000 home in a USDA-eligible rural area. Your Home Possible first mortgage would be $100,000 (50% LTV). The USDA second mortgage could provide up to $90,000 (45% of purchase price), leaving you with a $10,000 down payment requirement.
Strict Eligibility Requirements You Must Meet
This program requires you to satisfy both Home Possible and USDA RHS requirements simultaneously. Where the programs conflict, the stricter USDA rules typically apply.
Your income cannot exceed USDA's moderate-income limits for your area, which are often lower than Home Possible limits. The property must be located in a USDA-designated rural area — suburban and urban properties don't qualify regardless of your income.
You must be a first-time homebuyer or meet USDA's definition of someone who hasn't owned a home in the past three years. The home must be your primary residence, and you'll need to complete homeownership education before closing.
USDA also limits your liquid assets after closing. You generally cannot have more than $7,500 in checking, savings, and investment accounts combined after paying your down payment and closing costs.
Required Documentation for Both Programs
Your lender needs standard Home Possible documentation plus additional USDA-specific forms. The USDA paperwork includes several forms with specific revision dates that must be used.
You'll need to provide a Borrower's Certification of Eligibility (Form RD 1944.59) to verify you meet USDA requirements. Your lender must also obtain copies of all executed USDA second loan documents, including the promissory note, deed of trust or mortgage, subsidy repayment agreement, interest credit agreement, and agreement with prior lienholder.
The USDA field office must separately underwrite and approve your application for the second mortgage. This happens parallel to your first mortgage approval process and can add time to your overall approval timeline.
How the Loan Structure Works
The first mortgage follows standard Home Possible guidelines with one major exception — the maximum loan-to-value ratio drops to 50% instead of the typical 95% or 97% allowed for regular Home Possible loans.
Your total debt-to-income ratios must comply with USDA limits, which may be more restrictive than Home Possible allows. USDA typically requires housing payments to stay below 29% of gross monthly income and total monthly debt payments below 41%.
The USDA second mortgage includes subsidy repayment obligations. If your income rises above USDA limits or you sell the home within a certain timeframe, you may need to repay some or all of the interest subsidy you received.
Property and Location Restrictions
The property must be a single-family home that serves as your primary residence. Investment properties, vacation homes, and multi-unit properties don't qualify.
USDA maintains specific maps showing eligible rural areas. Many areas that feel suburban may still qualify if they're outside metropolitan statistical areas or have populations below USDA thresholds. Your lender can verify eligibility using the USDA's online mapping tool.
The home must meet USDA property standards, which include specific requirements for well and septic systems in areas without public utilities. A USDA-approved appraiser must complete the property valuation.
Common Complications and Gotchas
Income verification becomes more complex because you must satisfy both programs' requirements. If your income fluctuates or includes non-traditional sources, underwriters need to verify it meets both Fannie Mae and USDA standards.
The USDA approval process runs separately from your first mortgage approval. Delays in USDA processing can hold up your entire loan, even if the first mortgage is ready to close. Plan for longer processing times than typical conventional loans.
Property eligibility can change. USDA updates its rural designation maps periodically, and areas can lose eligibility as they become more developed. Verify current eligibility even if the area qualified in the past.
The subsidy repayment agreement creates long-term obligations. If your financial situation improves significantly or you decide to sell within the first few years, you may owe substantial repayment amounts that weren't obvious at closing.
Lender Requirements and Warranties
Your lender must be approved by both Fannie Mae for Home Possible mortgages and USDA for RHS lending. Not all lenders offer this combined program due to its complexity and additional compliance requirements.
The lender provides specific warranties to Fannie Mae about the USDA second mortgage. They must confirm the second mortgage closed before delivering the first mortgage to Fannie Mae, that all USDA documents use the correct forms, and that the second mortgage remains properly subordinated to the first mortgage.
Any modifications to standard USDA loan documents require Fannie Mae approval. This includes waivers or changes that USDA might normally approve for individual borrowers.
References
For the official guidelines, see 4205.2: Home Possible® Mortgages with RHS Leveraged Seconds in the Fannie Mae Selling Guide.
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Original Freddie Mac Guideline Text
This section contains:
Eligible Mortgages
Maximum loan-to-value (LTV) and total LTV (TLTV) ratio limits
(a)
®
Mortgage with an RHS Leveraged Second is eligible for sale to Freddie Mac in accordance with the provisions of this chapter. Freddie Mac will not purchase the RHS Leveraged Second.
The following additional terms apply for the purposes of this section.
Second Loan Documentation
Second Loan Documents are all of the following RHS documents:
Promissory Note, Form RD 1940-16 (Rev. 10-96)
Real Estate [Deed of Trust] or [Mortgage] for [the State in which the Mortgaged Premises is located], Form RHS 3550-14 (Rev. 10-96)
Subsidy Repayment Agreement, Form RD 3550-12 (Rev.10-96)
Interest Credit Agreement (Section 502 RHS Loans), Form FmHA 1944-6 (Rev. 12-95), and
Agreement with Prior Lienholder, Form FmHA 1927-8 (Rev. 1-92)
Second Loan Regulations
The provisions applicable to Section 502 direct leveraged Mortgages originated by RHS contained in Part 3550 of Title 7 of the Code of Federal Regulations and the RHS Direct Single Family Housing Loans and Grants Field Service Handbook and Centralized Servicing Center Handbook collectively with the forms, agreements, manuals and other material and documents issued by RHS, as may be modified by RHS from time to time.
(b)
Eligible Mortgages
The Home Possible Mortgage purchased by Freddie Mac must be:
A First Lien secured by a 1-unit Primary Residence
A purchase transaction Mortgage
A 30-year fully amortizing fixed-rate Mortgage
(c)
Maximum LTV and TLTV ratio limits
The maximum LTV ratio of the Home Possible Mortgage with the RHS Leveraged Second is 50%.
Note: The maximum LTV value of the Home Possible Mortgage does not include the RHS Leveraged Second.
The maximum TLTV ratio of the Home Possible Mortgage with the RHS Leveraged Second, which includes the RHS Leveraged Second and all other secondary financing, is the lesser of 95% or the maximum allowed under the Second Loan Regulations.
(d)
RHS requirements
The Seller must comply with all Freddie Mac requirements for Home Possible Mortgages. Freddie Mac may allow the Borrower underwriting and qualification flexibilities with Home Possible Mortgages that are not permitted for the first Mortgage under the Second Loan Regulations.
In the following areas, the Seller must comply with the provisions of the Second Loan Regulations pertaining to the first Mortgage even in situations where the underwriting and qualification requirements for Home Possible Mortgages are more flexible:
Amount and source of funds for the Down Payment and Closing Costs
Temporary subsidy buydown plans
Financing concessions, if used as a source of funds, must be limited to such Closing Costs as are customary in the market where the Mortgaged Premises are located.
(e)
Additional documentation
In addition to documentation required for the Home Possible Mortgage, the Mortgage file for Mortgages with an RHS Leveraged Second must contain:
A Borrower’s Certification of Eligibility, Form RD 1944.59 (Rev. 10-96)
Copies of the executed Second Loan Documents and any other documents executed by the Borrower in connection with the RHS Leveraged Second
(f)
Special Seller warranties
The Seller warrants that the RHS Leveraged Second:
Has been closed and all proceeds advanced to the Borrower or at the Borrower’s designation, prior to the Delivery Date of the Home Possible Mortgage
At all times after the Note Date of the Home Possible Mortgage, the debt obligation and lien or other restriction on the Mortgaged Premises, of the RHS Leveraged Second and any recorded Second Loan Document are subordinate to the Home Possible Mortgage
Was originated on the Second Loan Documents. Any changes or modifications to the Second Loan Documents must be approved by Freddie Mac
Was originated by RHS pursuant to the Second Loan Regulations in effect on the closing date of the RHS Leveraged Second. Any waivers or modifications to the RHS Second Loan Regulations with respect to an individual Borrower must be approved by Freddie Mac.
Was originated by a Seller approved by RHS
In addition, the Borrower must be underwritten and approved by the RHS Field Office for the RHS Leveraged Second.
(g)
Section 6302.14
for delivery and pooling requirements for Home Possible Mortgages with RHS Leveraged Seconds sold to Freddie Mac.
(h)
Credit Fees
For Credit Fees and Credit Fee Caps related to Home Possible Mortgage with an RHS Leveraged Second, the Seller must refer to
, and
Exhibit 19A, Credit Fee Cap Eligibility Criteria
. Credit Fees are paid in accordance with the Credit Fee provisions stated in
Chapter 6303
.
