Section 538 in 2026: What the 80% Loan-to-Cost Limit and 1.11 DSCR Pilot Mean for USDA Multifamily Feasibility
By Michal Mohelsky, J.D., FMVA | Principal, MMCG Invest, LLC | September 29, 2026
On September 25, 2026 the Rural Housing Service raised the Section 538 loan-to-cost ceiling to 80% and cut the coverage floor to 1.11 for the first 200 loans of a two-year pilot. The headline is leverage. The arithmetic says coverage still sets the loan on most rural deals, a 100 basis point rate move erases three times what the pilot gives, and the market study has quietly become the credit document.
The notice that landed in the Federal Register on September 25 is eleven pages long and does two things (1). It changes the maximum loan-to-cost for Section 538 loans guaranteed under Option 3, the continuous construction-to-permanent guarantee, from 70% to 80% of total development cost. And it launches a Multifamily Housing Preservation Pilot that runs from October 9, 2026 to September 25, 2028, inside which the debt service coverage ratio for Section 538 drops from 1.15 to 1.11 for the first 200 loans closed, with room to go lower if the lender's market analysis supports it.
Trade coverage has treated this as a leverage story, and the industry asked for exactly this. The Council for Affordable and Rural Housing wrote to USDA in March 2025 requesting a DSCR of 1.11 to align Rural Development with HUD, and its September 25 alert calls the notice a response to longstanding member concerns (18). Both points are fair. But a feasibility firm reads a notice differently from an advocate. We size loans for a living, and when we ran the new terms through the arithmetic that lenders actually use, three things stood out.
First, on most rural Section 538 transactions the loan amount is set by coverage, not by cost. The 80% ceiling only matters when the project's net operating income yield on total cost is above roughly 6.6%, and national cap rates for the older, smaller apartment stock that Section 538 finances sit almost exactly there. Second, the pilot's DSCR relief adds about 3.6% to loan proceeds, which a 100 basis point rise in the note rate takes away three times over, and the annual guarantee fee alone offsets most of it if the study forgets to include it. Third, every piece of flexibility the notice offers routes through one phrase: "the lender's analysis of current market conditions and comparable properties in the project's market area." That phrase is the market study. This article is about what the notice changes, what it does not, and what a feasibility study has to prove now that the agency has moved more of the decision onto it.
What Changed on September 25
The notice acts under Section 506(b) of the Housing Act of 1949, which lets the agency run demonstrations that depart from published rules, and it states that every program requirement not expressly waived still applies (1). The loan-to-cost change stands outside the pilot. The notice says it "is not a part of the Pilot," and the legal basis is 7 CFR 3565.52(c)(3), which makes Option 3 available only to projects with a low loan-to-cost ratio "defined by the Agency in a Notice published periodically in the Federal Register" (3). The prior 70% figure came from a 2019 notice (5). No effective date is stated for the change beyond "is now being increased," so the working reading is that it applied on publication and is not limited by the 200-loan cap.
The pilot itself has three parts: Section 515 transfers outside the existing Simple Transfer Pilot, Section 515 transfers that use low-income housing tax credits, and Section 538 transactions "regardless of whether a transfer is involved up to the first 200 guaranteed loans" (1). For Section 538 the operative terms are these:
The DSCR requirement in 7 CFR 3565.303(d)(2) and (f)(2) is reduced to 1.11 for the first 200 loans closed. The agency "may approve a lower DSCR ... if appropriate, based on the lender's analysis of current market conditions and comparable properties in the project's market area" (1).
The developer fee is capped at 15% of total development cost when it is not funded by tax credits or a government program (1).
The agency may apply risk-tiered underwriting and documentation standards, with tiers determined by "the presence of rental assistance, LIHTC equity, operating history, and market strength," and it will notify the public of the tiers later (1).
The agency may accept HUD environmental reviews, HUD capital needs assessments and related third-party reports where HUD financing is also involved, and may defer to LIHTC or HUD rent and income standards (1).
For Section 515 transfers the pilot goes further. The agency's technical review of the appraisal is waived except where a trigger fires, for example proposed rents that rise significantly above current levels or building costs out of line with the market, and a capital needs assessment approved by a tax credit allocating agency can replace the agency's own form (1). Section 515 construction in the pilot may follow state and local codes rather than the agency's Part 1924 standards (1).
Two things about the text deserve a plain statement because they will shape how the pilot actually runs. The risk tiers do not exist yet. The notice names four factors, defines no thresholds, and does not say whether a tier changes DSCR, loan-to-cost, reserves or fees. As of September 29 no follow-up notice, letter or program page update had appeared (1). And the notice counts the 200 slots as "loans closed" in the DSCR clause but refers to transactions the agency "processes under the Pilot" in the risk-tier clause, without saying how a slot is assigned, whether at application, conditional commitment or closing. A published paragraph still reads "At the conclusion of the Pilot in {month} 2028," placeholder intact (1). Lenders with pipeline deals should ask their state office how the count works before assuming a slot.
The Loan Amount Is Set by Coverage, Not by Cost
A Section 538 guaranteed loan is sized by two tests and the borrower gets the smaller answer: the loan the property's net operating income can cover at the required DSCR, and the loan the loan-to-cost ceiling allows. Raising the ceiling only increases proceeds when the coverage test is not already the binding one. So the question that matters is where the two tests cross.
Section 538 loans run 25 to 40 years and may amortize over up to 40 years, with no interest credit available since fiscal 2025 (3)(7). At a 7.0% note rate and a 40-year monthly amortization, the annual loan constant is 7.457%. At a 1.11 DSCR, each $1 of NOI supports $12.08 of debt; at 1.15 it supported $11.66. That is the pilot's gift, and it is worth 3.6% of proceeds. The two tests meet when NOI divided by total development cost equals 0.80 times 1.11 times 7.457%, which is 6.62%. Below a 6.62% yield on cost, the coverage test sets the loan and the 80% ceiling is irrelevant. Above it, the ceiling binds and the DSCR relief is irrelevant. A deal cannot benefit from both changes at once.
A worked example makes the point. Take a $10 million total development cost and $600,000 of stabilized NOI, a 6.0% yield on cost, which is ordinary for a rural acquisition-rehab.
Scenario | Coverage-limited loan | Loan-to-cost limit | Loan amount | Binding test |
Pre-2026 rules (1.15 DSCR, 70% LTC) | $6,996,000 | $7,000,000 | $6,996,000 | Coverage, barely |
2026 rules (1.11 DSCR, 80% LTC) | $7,249,000 | $8,000,000 | $7,249,000 | Coverage |
2026 rules at an 8.0% rate | $6,478,000 | $8,000,000 | $6,478,000 | Coverage |
2026 rules with NOI at $662,000 (6.62% yield) | $8,000,000 | $8,000,000 | $8,000,000 | Both |
The new rules add $253,000 to this loan, all of it from the DSCR change. The 80% ceiling adds nothing until NOI reaches $662,000. And if the note rate moves from 7.0% to 8.0%, the constant rises to 8.344%, and the loan falls by $771,000, three times the pilot gain. The rate assumption itself deserves a word. No lender publishes Section 538 note rates, and OMB's budget assumptions for the fiscal 2026 cohort carry a 5.94% borrower rate (10). With the 10-year Treasury above 5%, 7.0% is the realistic sizing case and 8.0% is the stress case (29). That is not an abstract risk in the fall of 2026. The 10-year Treasury closed at 5.24% on September 28, its highest level since 2007, after the Federal Reserve raised its policy rate on September 16 and signaled another increase before year end (29).
One more line item deserves attention because it is routinely left out of sizing. The Section 538 guarantee fee is 0.65% up front and 0.35% a year on outstanding principal for standard loans, and 0.60% and 0.25% for preservation of Section 515, 514 and 516 properties, workforce housing at 80% to 115% of area median income, and green projects (6). If the sizing model treats the 7.0% note rate as the all-in cost and the annual fee sits outside it, a 0.25% fee raises debt service by about 3.4% and cuts proceeds by about 3.2%. That is almost exactly the pilot's DSCR benefit. A study that shows the 1.11 gain and omits the fee has overstated the improvement by nearly all of it.
Where the Break-Even Sits in Today's Market
A 6.62% break-even yield would be an academic curiosity if the market sat far from it. It does not. Our national multifamily series puts the current market cap rate at 6.3% for 3 Star properties and 6.7% for 1 and 2 Star properties, with year-to-date closed transactions averaging 6.5% and 6.6% respectively; 4 and 5 Star assets trade near 5.6% (30). Section 538 finances the older, smaller, workforce end of that spectrum, and about half of its loans in recent years have gone into existing Section 515 properties (8)(9). An acquisition-rehab bought at or near market pricing therefore lands within a few basis points of the break-even. Whether the 80% ceiling does anything for the deal depends on whether the rehab lifts NOI enough to push the yield on the all-in cost above 6.6%, or the property was bought below market. For a rehab whose cost is added to a purchase near market cap rates, the yield on cost usually falls, and coverage remains the constraint.
The spread between those cap rates and a 5.24% Treasury is also the thinnest it has been in this cycle, which is the market's way of saying the same thing the sizing math says: the 80% ceiling is a headline that the cost of debt has largely neutralized. Our series forecasts the national cap rate easing from 6.2% in 2026 to 6.0% by 2029, but that path assumes rate relief that the September FOMC did not deliver (30).
A Thinner Cushion Meets Rising Expenses
Coverage is a cushion. At 1.15, NOI can fall 13.0% before the property stops covering its debt service; at 1.11, the cushion is 9.9%. The pilot removes about a quarter of the margin for error on the first 200 loans. That would be a modest trade in a stable expense environment. The environment is not stable.
The Federal Reserve's staff analysis of multifamily insurance found that real average premiums rose from $39 to $68 per unit per month between 2019 and 2024, an increase of more than 75%, and that insurance grew from 1.95% of revenue in 2000 to 4.78% in 2024 (16). The same work found that only about 25 to 40 cents of each dollar of insurance increase passed through to rents. In the USDA rental assistance portfolio, 77.57% of properties received a rent increase in 2025 averaging $86.03 per unit per month, up from $71.92 in 2024 and $54.30 in 2023, and USDA attributes the acceleration to insurance and to rural inflation running ahead of the national factor (9). Properties operating under Section 515 or tax credit rent limits cannot simply raise rents to absorb an expense shock. The shock lands on NOI.
The arithmetic is unforgiving at 1.11. A property earning $4,000 of NOI per unit that absorbs a $300 per unit insurance increase with no pass-through loses 7.5% of its NOI, three-quarters of the entire cushion. Add a property tax reassessment after a transfer, which is exactly what a preservation transaction triggers, and the cushion is gone. This is why the feasibility question under the pilot is no longer whether NOI clears 1.11 on day one. It is whether NOI holds at 1.11 through the expense cycle, and the study has to show that with expense stress cases, not a single pro forma.
A Program That Has Not Used Half Its Money
The most surprising fact about Section 538 is not in the notice. It is in USDA's own budget tables. The program has carried a $400 million guarantee authority every year since at least fiscal 2023 and has obligated roughly half of it (8)(9).
Fiscal year | Program level | Obligations | Unused authority | Notes |
2023 | $400.0 million | $167.6 million | $232.4 million | |
2024 | $400.0 million | $224.7 million | $175.3 million | 76 loans in 18 states, average $2.96 million |
2025 | $400.0 million | $187.6 million | $212.4 million | 22 states; North Carolina $66.6 million, Texas $33.8 million |
2026 | $400.0 million | $212.0 million (estimate) | $188.0 million | USDA estimate |
2027 | $500.0 million requested; $400.0 million in the House bill | $208.4 million (estimate) | $191.6 million to $291.6 million | Request would widen the gap (11) |
Money is not the constraint on this program, and it has not been for years. The lender universe is. USDA's list of approved Section 538 lenders as of December 31, 2025 shows 20 active lenders that have closed a loan, among them Bellwether Enterprise, Churchill Mortgage Investment, Greystone, Lument, Merchants Capital, PNC, Rockhall Funding, TD Bank and four state housing finance agencies, with another 21 approved but yet to close (12). Twenty active lenders originating 76 loans a year is a boutique program, and that shapes what the pilot's 200-loan cap actually means.
Over the pilot's roughly 23.5 months, the fiscal 2024 pace of 76 loans a year yields about 150 loans, short of the cap. Filling 200 slots would require about 102 closings a year, a third above the recent pace. In dollar terms, 200 loans at the fiscal 2024 average of $2.96 million is about $592 million against roughly $800 million of authority over two fiscal years. So the calendar binds first at historical volume, the 200-loan cap binds if volume rises by a third, and the dollar authority is unlikely to bind at all. Two caveats: the pilot counts loans closed while the budget counts obligations, and Section 506(b) requires the agency to stop the pilot if its cost exceeds the statutory cap (1). USDA's own claim that $400 million supports about 57 projects and 3,360 units implies $7 million per project, more than double the observed average, and should not be used to forecast volume (8).
The preservation stakes explain why USDA is pushing. The Section 515 portfolio stands at more than 12,000 properties and about 400,000 units, 95% of the agency's multifamily inventory (1)(2). USDA's 2023 preservation notice projected 137,000 units leaving the program by 2033 and up to 333,000 by 2050 as mortgages mature; its fiscal 2026 budget notes put the 2050 figure at 228,700 without substantially higher preservation funding (8)(17). Each $1 of Section 538 guarantee leverages about $2.88 of other capital (8). The pilot's stated ambition is to reach about 10% of the portfolio in two years (1). Whether 20 lenders and 200 slots can get there is the open question.
The Market the Pilot Arrives In
Rural markets are not the Sun Belt, and a national apartment series has to be read with that in mind. But the national picture by quality class tells a story that matters for Section 515 preservation specifically, because the properties in that portfolio are the older, smaller stock that our data classifies as 1 and 2 Star.
The national vacancy rate stands at 7.8%, down from a peak of 8.5% in the fourth quarter of 2025, and stabilized vacancy excluding lease-ups is 6.6% (30). The split by class is wide: 9.6% for 4 and 5 Star, 7.9% for 3 Star, and 6.0% for 1 and 2 Star. The newest buildings are the emptiest because that is where the record 2024 deliveries landed, and they are still buying occupancy with concessions that reach 8% to 10% of asking rent in Austin, Charlotte, Sarasota, Nashville, Phoenix and Denver (30). Rent growth is 1.4% nationally and 1.3% in the 1 and 2 Star segment.
The detail that we find most useful for rural underwriting is the absorption history of that older stock. Between 2022 and 2025 the 1 and 2 Star segment lost tenants every year, a cumulative net absorption of roughly 122,000 units negative, as households moved up into new supply that was offering weeks of free rent (30). In 2026 the sign has flipped: year-to-date absorption in the segment is positive 14,076 units, and the segment's vacancy of 6.0% is the lowest of any class. The filtering that hurt older properties during the supply wave is reversing as concessions fade and starts collapse. Starts in the third quarter were about 60,000 units, the lowest quarterly total since 2012, and the national pipeline has fallen from nearly 1.2 million units under construction at the 2023 peak to about 563,000 (30).
For a rural Section 538 preservation deal, this cuts two ways. Demand for existing, affordable stock is firming, and the rehabilitated 515 property faces less new competition than at any point since the pandemic. But rent growth of 1.3% does not fund an insurance increase, and a restricted-rent property cannot capture whatever growth the market offers anyway. The market study has to establish that the property's specific market area behaves like the national older-stock trend, with a comparable survey rather than a national chart.
The Market Study Is Now the Credit Document
Here is the sentence in the regulation that the pilot leans on. Under 7 CFR 3565.303(d)(2) and (f)(2), the lender certifies cash flow showing compliance with the DSCR requirement "based on the lender's analysis of current market conditions and comparable properties in the project's market area" (3). That language has been there all along, attached to 1.15. The pilot moves the floor to 1.11 and then makes the same analysis the basis for going lower. It also names "market strength" as one of four factors that will determine a deal's risk tier, and therefore its documentation requirements, once the tiers are published (1). The agency has not written a content standard for that analysis, and the handbook already allowed a lower ratio with agency approval against 1.15 (4). What has changed is how much rides on it.
The formal market study requirement for Section 538 sits in HB-1-3565, which says a separate market study "will be conducted" and must include the 13 items in Exhibit 3-8: employment, population and households, households by income, building permits, housing stock, a rental survey with name, unit count, bedroom mix, year built, rents, vacancies, location and amenities for each property, rent-overburdened households, a demand projection, and tax credit rent and income detail where credits are involved (4). USDA's December 2024 funding notice repeats the same list as a minimum (7). The handbook sets qualifications for appraisers, requires appraisals to be no more than a year old and to rely most heavily on the income approach, but sets no preparer qualification, independence requirement or shelf life for the market study (4). A proposed rule published June 30, 2025 would write a market study requirement for new construction into 7 CFR 3565.254 itself; it drew nine comments and has not been finalized (23).
Section 515 runs on its own rules, and they are stricter in one respect. A professional market study is required for 12 or more units, and any USDA multifamily property with 50 or more units must follow HUD's Multifamily Accelerated Processing guidelines for the study (24). On transfers, need must be documented and "more complete documentation will be required if vacancy exceeds 10 percent," while the rents that drive the transfer analysis come from an RD-compliant appraisal or an area market rent survey (24). The pilot lets a HUD-compliant or allocating-agency-approved capital needs assessment stand in for USDA's own form, and lets HUD environmental reviews be reused under USDA's NEPA procedures at 7 CFR Part 1b (1)(25). It does not expressly accept a housing finance agency's tax credit market study. Where HUD financing is also in the deal, such a study might qualify as a "related third-party report"; where it is not, the agency has given no basis for relying on it.
So the practical position for a Section 538 sponsor in the pilot is this. The Exhibit 3-8 study is still required in full, nothing in the notice waives it, and the same document now has to do two more jobs. It has to support the lender's certification at 1.11 or below by presenting comparable rents, vacancies, concessions and utility allowances for a defined market area in a form the reviewer can trace to the pro forma. And it has to state market strength plainly enough to place the deal in a risk tier when the tiers arrive. State allocating agencies already require studies dated within six to twelve months of application and, in some states, preparers in good standing with the National Council of Housing Market Analysts. USDA sets neither, but a reviewer weighing a below-1.11 request will borrow those conventions whether or not they are written down.
Construction Standards Are Being Rewritten Mid-Cycle
Six weeks before the pilot notice, Rural Development proposed to rescind 7 CFR Part 1924, the construction and repair regulation that has governed USDA-financed housing since the Farmers Home Administration era, with comments due October 19, 2026 (19)(20). The proposal removes the part and reserves it. For the business programs it points construction to the Community Facilities standards in Part 1942; for housing it names no federal replacement, on the reasoning that state and local codes and program underwriting are sufficient (19). As of September 29 the docket showed eight comments and the notice carried no regulatory impact analysis, no cost estimate and no timeline estimate (19).
What actually falls away for a Section 538 deal is narrower than the headline suggests. Part 1924 supplies the technical benchmark: HUD Minimum Property Standards appendices, the Exhibit D thermal performance table with its U-values by degree-day zone, the site development standards in Subpart C, and the development plan, cost breakdown and plan certification forms (19). The day-to-day controls on a construction-advance loan sit elsewhere. Part 3565 and Chapter 5 of the handbook still require a licensed architect with full services, State Architect review of plans and cost estimates, a pre-construction conference, inspections at footing, enclosure and final for each building and before every draw, 100% payment and performance bonds or a letter of credit of at least 25% of the contract, a construction contingency of at least 2%, AIA contract and pay-application forms, a one-year warranty and an audited cost certification where there is an identity of interest (3)(4). None of that is in Part 1924, and none of it is proposed for removal.
Two loose ends matter for anyone closing in 2027. The proposed rule does not amend Part 3565, so sections 3565.254(a) and 3565.303(d)(1) would still require certification to Part 1924 "or its successor regulations," and no housing successor is named (3)(19). How a lender certifies construction compliance for the permanent guarantee after a final rule is unresolved. And the federal energy floor has already moved: a May 1, 2026 notice withdrew the 2024 determination that would have required the 2021 IECC and ASHRAE 90.1-2019 for covered programs, returning them to the standards in effect before, which date to 2015 (21). HUD and USDA's own analysis had priced the 2021 IECC at a national average of $3,002 per unit for low-rise multifamily (22). If Part 1924 goes, the Exhibit D thermal table stops binding as well. That is a modest hard-cost saving in jurisdictions without an adopted energy code and an unquantified one everywhere else; USDA has not put a number on it and neither should a feasibility study.
The cost side of the ledger is moving the other way. The median builder in the National Association of Home Builders' July survey reported material costs up 6.7% year over year, and the median for builders who started five or fewer homes in 2025 was 9.1% (26). Rural rehab contractors are small builders. A construction budget in a Section 538 study prepared this fall should carry the high end of that range, keep every soft-cost line the handbook still requires, and state which construction standard the estimate assumes, because the answer may differ between the study date and the closing date.
How Section 538 Now Compares
The pilot brings Section 538 into line with HUD on coverage, and slightly ahead of the agencies on term.
Execution | Maximum leverage | Minimum DSCR | Amortization |
USDA Section 538, Option 3, pilot | 80% of cost | 1.11 | Up to 40 years |
USDA Section 538, outside the pilot | 80% of cost | 1.15 | Up to 40 years |
HUD 221(d)(4) and 223(f), affordable with rent advantage | 90% | 1.11 | 40 years for 221(d)(4) |
HUD, market rate | 87% | 1.15 | 40 years for 221(d)(4) |
Fannie Mae DUS, conventional | 80% | 1.25 | 30 years |
Fannie Mae affordable | 80% | 1.20 | 30 to 35 years |
Freddie Mac Conventional Small ($2 million to $10 million) | 80% | 1.25 | 30 years |
Freddie Mac tax-exempt and LIHTC | Up to 90% | 1.15 | 30 to 35 years |
HUD's Mortgagee Letter 2025-03 set the 90% and 1.11 terms for affordable deals in January 2025, and we found no 2026 letter that changes them (13). Agency terms are drawn from lender and broker summaries rather than published rate sheets and should be treated as indicative (15). The most consequential comparison is not in the table. On April 15, 2026 Freddie Mac retired its Small Balance Loan program, which had financed about $47 billion across more than 17,000 loans since 2015, and replaced it with a Conventional Small product covering loans of $2 million to $10 million (14). Section 538 has no minimum loan size and its fiscal 2024 average was under $3 million. For the sub-$2 million rural deal, it is now one of very few 40-year fixed-rate executions left.
Two recent capital stacks show how the program is being used. Greystone closed $52.55 million of Section 538 construction-to-permanent debt in February 2026 alongside $28.4 million of tax credit equity on a 10-property, 640-unit rural North Carolina rehab portfolio, the guarantee covering about 65% of sources (27). Churchill Stateside Group closed a $19.52 million Option 3 construction-advance loan in August 2026 on a 202-unit, eight-property Section 515 portfolio in Fallon and Lovelock, Nevada, securitized through Ginnie Mae, with a $9.6 million equity bridge and $13.5 million of tax-exempt bonds (28). Both are preservation portfolios. Both were sized on coverage.
What We Would Put in a Section 538 Feasibility Study Today
The notice does not change what a feasibility study is. It changes what the study has to be ready to prove, and to whom. This is how we are building them.
Show the binding test and the break-even yield. State the NOI yield on total development cost next to the 6.62% break-even at the assumed rate, so the lender can see in one line whether the 80% ceiling is doing anything. For most rural rehabs it is not.
Size at two rates and show the fee. Present proceeds at the lender's quoted rate and at plus 100 basis points, and state whether the annual guarantee fee is inside or outside the note rate. Leaving it out overstates proceeds by about 3%.
Stress expenses, not just rents. Run insurance at plus 25% and plus 50%, property taxes at a post-transfer reassessment, and utilities at the local trend, and report the resulting DSCR against 1.11. State plainly whether the 9.9% cushion survives.
Write the comparable survey to carry the certification. Define the market area, list every comparable with rents, vacancy, concessions and utility allowances, reconcile the survey to the pro forma rents, and present absorption and vacancy trends for the defined area. This is the "lender's analysis" the agency will rely on, and it should read as one.
Say what market strength is. Since it is a named tier factor, give it a plain conclusion supported by the survey, so the deal can be placed in a tier the day the tiers are published.
Keep Exhibit 3-8 complete and the study dated. Nothing in the notice waives the 13 items. Deliver the study within six months of application and refresh it if the closing slips past twelve, because that is the convention reviewers will apply.
Document the preservation mechanics. For a Section 515 transfer, cover rental assistance retention or decoupling, the rent basis for the transfer, the depth of demand at restricted rents, and the capital needs assessment's alignment with whatever HUD or allocating-agency standard the pilot lets the agency accept.
State the construction standard. Name the code and standard the hard-cost estimate assumes, carry the high end of current material inflation, and keep the architect, inspection, bonding and contingency lines the handbook still requires.
What to Watch
The risk-tier notice is the item that could change this analysis most. USDA has committed to publishing tiers and documentation requirements and has not said when (1). Comments on the Part 1924 rescission close October 19, 2026, and a final rule could arrive any time after (19). The Section 538 market study rule from June 2025 remains proposed and could be finalized without further notice (23). Fiscal 2027 appropriations are running on a continuing resolution through December 11, with the President's request at $500 million and the House at $400 million for Section 538 (11). And the note rate: every 25 basis points is worth close to 3% of proceeds on a 40-year loan, about four-fifths of what the entire pilot delivers.
Frequently Asked Questions
Did USDA raise the Section 538 loan-to-cost limit for all loans or only for the pilot?
For all Option 3 continuous guarantees. The September 25, 2026 notice states that the loan-to-cost change "is not a part of the Pilot" and raises the Option 3 maximum from 70% to 80% of total development cost. The 1.11 DSCR, by contrast, applies only to the first 200 Section 538 loans closed under the pilot, which runs from October 9, 2026 to September 25, 2028.
How much more loan does the 1.11 DSCR actually produce?
About 3.6% more proceeds than 1.15 at the same rate and NOI, because 1.15 divided by 1.11 is 1.036. On a $7 million loan that is roughly $250,000. A 100 basis point increase in the note rate on a 40-year loan reduces proceeds by about 10.6%, so the rate matters three times as much as the pilot.
When does the 80% loan-to-cost limit make a difference?
Only when the project's NOI yield on total development cost is above the break-even where the coverage and cost tests cross. At a 7.0% rate, 40-year amortization and 1.11 coverage, that break-even is about 6.62%. Below it, coverage sets the loan and the higher ceiling is unused.
Can a Section 538 loan be underwritten below 1.11 in the pilot?
The notice says the agency may approve a lower ratio "if appropriate, based on the lender's analysis of current market conditions and comparable properties in the project's market area." It sets no floor, no content standard for that analysis and no approval process. In practice the market study's comparable survey is what has to justify it.
Is a market study still required for a Section 538 loan?
Yes. HB-1-3565 requires a separate market study covering the 13 items in Exhibit 3-8, and nothing in the 2026 notice waives it. A June 2025 proposed rule would write a market study requirement for new construction into the regulation itself; it has not been finalized.
What does the proposed rescission of Part 1924 mean for a deal closing in 2027?
If finalized, it removes USDA's federal construction, thermal and site-development benchmarks for housing programs and relies on state and local codes instead. The architect, inspection, bonding, contingency and warranty requirements in Part 3565 and the handbook remain. The unresolved point is how lenders certify construction compliance while Part 3565 still references Part 1924, since the proposal names no successor standard for housing.
Are the risk tiers in effect?
Not yet. The notice names four factors, rental assistance, tax credit equity, operating history and market strength, and says the agency will publish the tiers and their documentation requirements later. As of September 29, 2026 nothing had been published.
Request a Feasibility Study https://calendar.app.google/EJzWEz3GCqLY2jU86
Michal Mohelsky, J.D. | Principal | mmcginvest.com
Contact: michal@mmcginvest.com
Phone: (628) 225-1125
Working with MMCG
MMCG Invest, LLC prepares lender-facing feasibility studies and market studies for multifamily and affordable housing projects financed through USDA Section 538 and Section 515, including Section 515 transfers and preservation portfolios, low-income housing tax credit developments, HUD 221(d)(4) and 223(f), Fannie Mae and Freddie Mac executions, and conventional bank and life company debt. Our studies are prepared under USPAP discipline, cite a document for every claim, and set out the comparable rent survey, absorption, operating expense, coverage and capital assumptions in the form a lender can certify and a credit committee can test. To discuss a project, contact Michal Mohelsky at michal@mmcginvest.com or (628) 225-1125.
Sources
Federal Register, Rural Housing Service, Multifamily Housing Preservation Pilot and Section 538 loan-to-cost percentage change, 91 FR 60930, September 25, 2026
USDA Rural Development, news release on the Multifamily Housing Loan Preservation Pilot, September 22, 2026
7 CFR Part 3565, Guaranteed Rural Rental Housing Program, sections 3565.52, 3565.208, 3565.209, 3565.254, 3565.301 and 3565.303, Electronic Code of Federal Regulations, current as of August 2026
USDA Rural Development, HB-1-3565, Guaranteed Rural Rental Housing Program Origination and Servicing Handbook, Chapters 3, 4 and 5 and Exhibit 3-8
Federal Register, Guaranteed Rural Rental Housing Low Loan-to-Cost Ratio, 84 FR 2487, February 7, 2019
Federal Register, Section 538 Guaranteed Rural Rental Housing Program guarantee fee notice, 87 FR 12077, effective April 4, 2022
Federal Register, Section 538 Guaranteed Rural Rental Housing Program notice of funding availability, 89 FR 104031, December 20, 2024
U.S. Department of Agriculture, FY2026 Budget Explanatory Notes, Rural Housing Service
U.S. Department of Agriculture, FY2027 Budget Explanatory Notes, Rural Housing Service, Tables RHS-6 and RHS-12
Office of Management and Budget, Federal Credit Supplement, Budget of the U.S. Government, Fiscal Year 2027
H.R. 8646, Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Act, 2027, passed the House June 4, 2026
USDA Rural Development, Section 538 Guaranteed Rural Rental Housing Program approved lender list, December 31, 2025
U.S. Department of Housing and Urban Development, Mortgagee Letter 2025-03, January 8, 2025
Freddie Mac Multifamily, announcement of the Conventional Small product and retirement of the Small Balance Loan program, April 15, 2026
Fannie Mae DUS and affordable housing loan terms as summarized in lender and broker term sheets, 2026
Board of Governors of the Federal Reserve System, FEDS Notes, analysis of multifamily insurance costs, September 19, 2025
Federal Register, USDA Rural Development notice on Section 515 preservation and portfolio maturity, FR Doc. 2023-12778, 2023
Council for Affordable and Rural Housing, letter to USDA Rural Development, March 28, 2025, and member alert on the pilot notice, September 25, 2026
Federal Register, Rescission of Rural Development's Construction and Repair Regulation, proposed rule, 91 FR 53540, August 19, 2026
USDA Rural Development, news release on the proposed rescission of Part 1924, September 1, 2026
Federal Register, withdrawal of the 2024 energy efficiency standards determination for covered housing programs, 91 FR 23450, May 1, 2026
Federal Register, HUD and USDA final determination on adoption of energy efficiency standards, 89 FR 33112, April 26, 2024
Federal Register, Multifamily Housing Guaranteed Rural Rental Housing Program Requirement To Submit a Market Study, proposed rule, 90 FR 27819, June 30, 2025
USDA Rural Development, HB-1-3560 Chapter 4 and HB-3-3560 Chapter 7, Section 515 market study and transfer requirements
Federal Register, USDA National Environmental Policy Act procedures, 7 CFR Part 1b, 91 FR 17092, April 3, 2026
National Association of Home Builders, Smaller Builders Report Higher Material Costs, August 26, 2026
Greystone, press release on Section 538 financing for a rural North Carolina affordable housing portfolio, February 24, 2026
Churchill Stateside Group and National Housing & Rehabilitation Association member news, Section 538 Option 3 financing for a Nevada Section 515 portfolio, September 2, 2026
Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates and FOMC statement of September 16, 2026; market data for the 10-year Treasury, September 28 and 29, 2026
MMCG Invest national multifamily series, data licensed from CoStar Group, as of September 29, 2026
Comments