Qualifying for Rural Housing Service Community Facility Loan with Bad Credit

There are three major types of community facilities loans through the rural loan program of the USDA: direct loans, guaranteed loans and grants. Each has its own requirements. While the USDA may be flexible in terms of income requirements for these loans, they are typically not as flexible with credit requirements. It is a misconception the government will lend to bad credit borrowers. A bad credit borrower seeking these loans will have the same challenges as a bad credit borrower seeking private bad credit business loans.

Qualifying under the Direct Loan Program

The Direct Loan Program provides loans straight from the USDA for the building of community facilities such as schools, libraries, hospitals, medical clinics and police stations in rural areas. These direct loans are only an option for borrowers who have not been able to locate a private loan. This means a borrower has to look for private loans first and provide reasons why the loan was not funded. Typically, "bad credit" is not a good reason. A better reason would be the lack of resources in the immediate area or the lack of interest in a community project. Borrowers with bad credit who do not qualify for private loans will need collateral or a cosigner to qualify for a nonprofit loan program through the USDA.

Using the Guaranteed Loan Program

If a borrower has only slightly lower than average credit, the guaranteed loan program may be an option. In this program, a private lender posts the funds needed for the project. Then, the USDA guarantees the loan, meaning it will purchase the loan from the lender if the borrower defaults. This guarantee from the USDA can be enough to inspire confidence in a private lender despite a borrower's less than perfect credit. Even so, a borrower should not have a record of defaults or delinquencies if he or she hopes to qualify for a small business loan with the USDA. The lower than average credit must be the result of a short credit history or other less threatening problems. If a borrower has defaulted on a federal loan in the past, the borrower will not be eligible for the guarantee or for a direct loan.

Applying for a Grant

Since grants do not need to be repaid, they often have the lowest credit requirements from a borrower. In this case, however, the borrower will have to go through a larger process of showing how the grant will be used to service the local community. Feasibility studies, financial projections and business plans are required for all three programs. For a grant, however, the application must be even better. Only a small amount of community facility loans are distributed each year. A borrower is competing with all other applicants in order to secure the funds before the grant program runs out. If a borrower has bad credit or a business has bad credit, opting for a grant will only succeed if the right steps are taken to make an application truly stand out in the eyes of the USDA.