What Are Section 502 GRH Mortgages
Section 502 Guaranteed Rural Housing (GRH) mortgages are home loans backed by the USDA Rural Housing Service that help moderate-income borrowers buy homes in eligible rural areas. These loans offer attractive terms like no down payment requirements and below-market interest rates.
Fannie Mae can purchase these USDA-guaranteed loans from approved lenders, but the process involves more complexity than standard conventional loans. The loans must follow both USDA regulations and Fannie Mae guidelines, with USDA rules taking precedence in most areas.
Think of it this way: you're getting a USDA loan that your lender can sell to Fannie Mae. The USDA guarantee protects both your lender and Fannie Mae if you default, but the loan must meet strict eligibility requirements from both agencies.
Loan Structure and Limits
Section 502 GRH mortgages sold to Fannie Mae must be 30-year fixed-rate loans secured by your primary residence. No adjustable rates, interest-only payments, or investment properties qualify.
The loan amount cannot exceed the lower of two limits: the maximum allowed under USDA regulations or Fannie Mae's conventional loan limits for your area. For 2024, Fannie Mae's baseline limit is $766,550 in most areas, with higher amounts in expensive markets.
Your loan can be either assumable or non-assumable. If it's assumable, future buyers can take over your loan payments and terms. If it's non-assumable, the loan must be paid off when you sell.
Property and Borrower Requirements
USDA regulations control who qualifies and what properties are eligible. Your income must fall within USDA limits for your area and household size. The property must be in a USDA-eligible rural area, which includes many suburban communities despite the "rural" designation.
The loan-to-value ratio can go up to 115%, meaning you can finance more than the home's appraised value in some cases. This higher ratio accounts for USDA's upfront guarantee fee, which gets rolled into the loan balance.
USDA also sets the rules for acceptable down payment sources, secondary financing, and property insurance requirements. These may differ from standard Fannie Mae guidelines.
Required Documentation
Your lender must obtain several USDA-specific documents before selling your loan to Fannie Mae. The key forms include the Conditional Commitment (Form RD 1980-18), which shows USDA's preliminary approval of your loan.
After closing, your lender needs the Loan Guarantee (Form RD 1980-17), which provides the actual USDA backing. They must also complete the Guaranteed Loan Closing Report (Form RD 1980-19) and pay the USDA guarantee fee.
Within 15 days of selling your loan to Fannie Mae, your lender must file a Lender Record Change (Form RD 1980-11) with USDA. This form notifies USDA that Fannie Mae now owns your loan while your original lender continues servicing it.
Lender Requirements and Approval Process
Not every lender can originate Section 502 GRH mortgages for sale to Fannie Mae. Lenders must first get approved by USDA to participate in the guaranteed loan program and execute a Lender Agreement (Form RD 1980-16).
Additionally, lenders need separate written approval from Fannie Mae before they can sell these loans. This involves contacting their Fannie Mae representative or calling the support center. The approval process ensures lenders understand both USDA and Fannie Mae requirements.
Your lender must maintain their USDA approval and lender agreement throughout the life of any loans they sell to Fannie Mae. If USDA revokes their approval, it could affect their ability to sell future loans.
Mortgage Instruments and Payment Structure
The legal documents for your loan depend on whether it's assumable. Assumable loans must use FHA-approved mortgage instruments with all required riders and addenda. Non-assumable loans use standard Fannie Mae/Freddie Mac uniform instruments.
Regardless of which documents are used, your monthly payment must be due on the first day of each month. This standardization helps with loan servicing and investor requirements.
The mortgage instruments include specific language about the USDA guarantee and any special terms or conditions. Your lender will explain which version applies to your loan during the closing process.
Common Complications and Gotchas
The biggest challenge with Section 502 GRH mortgages is navigating dual oversight from both USDA and Fannie Mae. When requirements conflict, USDA rules typically win, but lenders must ensure they don't violate Fannie Mae standards either.
Property eligibility can be tricky because USDA's rural designation doesn't always match what borrowers expect. Some suburban areas qualify while others don't, and boundaries can change over time.
Income limits create another potential issue. USDA calculates household income differently than conventional loans, including income from all household members regardless of whether they're on the loan. A family member's income could push you over the limit even if they're not borrowing.
Timing can also cause problems. Lenders can sell loans to Fannie Mae before receiving the final USDA guarantee, but they must represent that no issues exist that would cause USDA to deny the guarantee. If USDA later refuses to issue the guarantee, the lender faces potential repurchase obligations.
Why These Rules Exist
The complex requirements reflect the government's goal of expanding homeownership in rural areas while protecting taxpayers. USDA's income limits ensure the program serves its intended moderate-income audience rather than higher-income borrowers who could qualify for conventional financing.
The dual approval process for lenders creates accountability. Both USDA and Fannie Mae want assurance that lenders understand the program requirements and will originate loans properly.
Documentation requirements provide an audit trail showing that loans meet all eligibility criteria. This protects both the government guarantee and Fannie Mae's investment in the loans.
References
For the official guidelines, see 4205.1: Section 502 GRH Mortgages guaranteed by USDA Rural Housing Service (RHS) in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
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Original Freddie Mac Guideline Text
This section contains:
(a)
Overview and defined terms
Section 502 GRH Mortgages guaranteed by the United States Department of Agriculture RHS are eligible for sale to Freddie Mac in accordance with the provisions of this chapter.
The Seller must obtain Freddie Mac’s written approval to sell Section 502 GRH Mortgages by contacting its Freddie Mac representative or the Contact Support Center at 800-FREDDIE.
(i)
Glossary definitions for Section 502 GRH Mortgages
Glossary
definitions of the following terms:
Glossary definitions for Section 502 GRH Mortgages
Government Mortgage
A Mortgage funded, guaranteed or insured by a government agency.
RHS
Rural Housing Service, an agency of the U.S. Department of Agriculture. Referred to on
Form 65, Uniform Residential Loan Application
, and
Form 1077, Uniform Underwriting and Transmittal Summary
, as “RD” (Rural Development).
Section 502 GRH Mortgage
A Mortgage originated to qualified Borrowers living in rural areas that is guaranteed by RHS pursuant to Section 502 of the Housing Act of 1949 (42 U.S.C. 1472) and originated and serviced pursuant to the RHS Guaranteed Regulations and the terms of the Guide. The related ULDD valid value is
USDA Rural Housing
.
(ii)
Other terms used in the section
The following terms apply for purposes of this section:
Conditional Commitment
The current Conditional Commitment for Single Family Housing Loan Guarantee — Form RD 1980-18
Guaranteed Regulations
The RD Instructions 1980D of Title 7, Part 1980, Subpart D of the Code of Federal Regulations, collectively with the forms, agreements, manuals and other material and documents issued by RHS, as may be modified by RHS from time to time.
Lender Agreement
The current RHS Agreement for Participation in Single Family Guaranteed/Insured Loan Programs of the United States Government Lender Agreement — Form RD 1980-16 executed by the Seller.
Lender Record Change
The current Guaranteed Rural Housing Lender Record Change — Form RD 1980-11.
Loan Guarantee
The current RHS guarantee issued on Form RD 1980-17.
Each Section 502 GRH Mortgage must be originated in compliance with all of the requirements of the Guaranteed Regulations and the Lender Agreement, unless these requirements are either:
Modified or waived in writing by RHS, and Freddie Mac has approved those modifications or waivers, or
Specifically restricted or modified by this chapter
(b)
A Section 502 GRH Mortgage must be:
An assumable or nonassumable First Lien secured by a Primary Residence
A purchase transaction or “no cash-out” refinance of existing Section 502 GRH Mortgage
A 30-year fully amortizing fixed-rate Mortgage
®
Mortgage
Section 502 GRH Mortgages must be sold to Freddie Mac with recourse, within the meaning of
Section 6201.2(b)(i)
.
(c)
Loan limits
No Section 502 GRH Mortgage may have an original principal balance in excess of the maximum principal loan amount allowed under the RHS Guaranteed Regulations or in excess of the maximum loan amounts for conventional Mortgages stated in
Section 4203.1(c)
, whichever is less. A Section 502 GRH Mortgage may not be a super conforming Mortgage.
(d)
Requirements
Each Section 502 GRH Mortgage must comply with the provisions of the Guide, except that if there are Guaranteed Regulations applicable to the following matters, the Guaranteed Regulations will apply:
Borrower underwriting
Financing concessions and temporary subsidy buydown plans
Loan-to-value (LTV) and total LTV (TLTV) ratios
Secondary financing
Sources of funds for Down Payment, Closing Costs and reserves
Title insurance
Each Section 502 GRH Mortgage must comply with the Guaranteed Regulations for LTV/TLTV ratios, and the LTV/TLTV ratios must not exceed 115%, as calculated under the requirements in
Section 4203.1(a)
.
(e)
(i)
Loan Guarantee
Section 502 GRH Mortgages are eligible for sale to Freddie Mac prior to the receipt of the Loan Guarantee if:
RHS has issued its Conditional Commitment and the conditions precedent to the issuance of the Loan Guarantee stated in the Guaranteed Regulations and the Conditional Commitment have been satisfied
The Seller has delivered the Guaranteed Loan Closing Report, current Form RD 1980-19, to RHS and has paid the RHS Loan Guarantee fee
As of the Delivery Date, the Seller represents and warrants that there is no basis for RHS to fail to issue the Loan Guarantee and that it has not been notified by RHS that the Loan Guarantee has been denied
(ii)
Lender Record Change
The Seller must complete and execute the Lender Record Change and submit it to the appropriate RHS Servicing Office within 15 calendar days after the Delivery Date of each Section 502 GRH Mortgage.
For purposes of completing the Lender Record Change, the Seller is the “Selling Lender,” Freddie Mac is the “Purchasing (Holding) Lender,” and the Seller is the “Lender’s Servicing Agent.” Freddie Mac’s lender identification number is 52-0904874. The Seller must leave the “Purchasing Lender Agency Assigned Branch No.” blank.
(f)
Mortgage file contents
In addition to the documents required in
Chapters 3301
and
3401
, the Mortgage file for each Section 502 GRH Mortgage must contain:
(g)
Special Seller warranties
The Seller warrants to Freddie Mac, as of the Delivery Date of each Section 502 GRH Mortgage, that:
The Seller has obtained a determination from RHS that the Seller is eligible to participate as an originating lender for Section 502 GRH Mortgages
The Seller has executed the Lender Agreement that is and will remain in full force and effect
The Loan Guarantee by RHS of the Section 502 GRH Mortgage is in full force and in effect as of the Delivery Date
The Seller has complied and will continue to comply with the RHS Guaranteed Regulations, the RHS Lender Agreement and all other applicable RHS guidelines, regulations and requirements
(h)
Mortgage instruments
If the Section 502 GRH Mortgage is assumable, it must be originated on Mortgage instruments approved by the FHA for FHA-insured assumable fixed-rate Mortgages with all applicable riders and addenda required by the FHA.
If a Section 502 GRH Mortgage is not assumable, it must be originated on the then-current Fannie Mae/Freddie Mac Uniform Instruments, including all applicable riders required in
Section 4101.2
for the jurisdiction in which the Mortgaged Premises are located.
For all Section 502 GRH Mortgages, the monthly payment due date stated in the Note must be the first day of the month.
(i)
Section 6302.15
for delivery and pooling requirements for Section 502 GRH Mortgages sold to Freddie Mac.
(j)
Exhibit 19, Credit Fees
, for Credit Fees related to Section 502 GRH Mortgages. Credit Fees are paid in accordance with the Credit Fee provisions stated in
Chapter 6303
.
