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Loan Guarantees
Loan Guarantees
Loan guarantee programs strengthen collateral by securing part of a loan against
default, often making the guaranteed portion of the loan eligible for sale in a secondary
market.
Criteria
- Loan guarantee programs are established primarily to meet needs of a target population
or to encourage development that meets specified community needs.
Uses
- Loan guarantee programs are offered by federal, state and local governments to
complement private financial institution lending.
- A wide variety of uses of loans are supported by guarantee programs, including fixed
asset and working capital financing.
- By making a loan eligible for sale in a secondary market, guarantees enhance the
liquidity of the lender.
Structure
- Funds for loan guarantees may come from a variety of both public and private sources.
- By insuring loans against default, loan guarantees help encourage financial institutions
to make loans on projects that are considered more risky than conventional loans.
- Federal guarantee programs are budgeted as part of agencies' annual appropriations.
- HUD Community Development Block Grants (CDBG) are the primary source of loan guarantees
in cities with populations of 50,000 or more.
- States use CDBG funds or other state revenues to make loan guarantees available in small
towns and rural areas.
- The guaranteed portion of a loan usually does not count against a bank's legal lending
limit.
BUSINESS AND INDUSTRY GUARANTEED LOANS
Rural Development (RD)
U. S. Department of Agriculture
Rural Development guarantees bank loans for financing business expansions, job creation
and job retention activities in rural areas.
Eligibility
- Individuals, public and private organizations, and federally recognized Indian tribal
groups are eligible.
- Borrowers must have 20 to 25 percent tangible balance-sheet equity for new businesses
and 10 percent for existing businesses.
- Borrowers must be in a rural area with population of 50,000 or less that has high
unemployment.
- Loans can finance the acquisition of land, buildings, machinery and equipment; working
capital; debt refinancing; housing development sites; processing and manufacturing
facilities; pollution control projects; and site development for housing for area
employees.
- Projects must demonstrate marketability, sufficient financial strength and continuity of
management.
Program
- Participating banks apply directly to RD.
- Maximum guarantees are 70 percent for loans over $5 million; 80 percent for loans over
$2 million but less than $5 million; and 90 percent for loans of $2 million or less. Loans
of less than $750,000 are usually referred to the SBA. Loan maturity is up to seven years
for working capital, five to 15 years for purchase of machinery and equipment, and up to
30 years for real property.
- Rates may be fixed or variable and are determined between the lender and the borrower. A
2 percent fee is charged on the guaranteed portion of the loan.
Contact
Local Bank or Rural Development
U. S. Department of Agriculture
GUARANTEED HOME LOANS FOR VETERANS
U. S. Department of Veteran Affairs (VA)
This program guarantees against loss by lenders for mortgage loans to eligible
veterans.
Eligibility
- Loans can be used to purchase and/or improve a single-family house; purchase a home or
condominium in a VA-approved project; refinance an existing loan; buy a mobile home and/or
lot on which to place a mobile home; or for home weatherization.
- Veteran must have served at least 90 days active service in wartime or 181 continuous
days in peacetime, unless an earlier discharge is attributable to a service-connected
disability. Veteran must not have been discharged under other than honorable conditions.
- World War I veterans are not eligible for the guarantee program. Reserve active-duty
training and active-duty training in the National Guard does not qualify candidates unless
they were called into regular active duty.
Program
- Up to 50 percent of a loan is guaranteed, or a maximum of $45,000.
- A down payment is not required by the VA if the purchase price is less than the value of
the property as determined by the VA. If the price is more than the established value, the
veteran must make up the difference.
- Maximum loan maturity is 30 years plus 32 days.
- Rates are negotiable with the lender. Rates are fixed for the life of the loan, but
loans may be refinanced for a lower rate.
- Fees include a loan origination fee of 1 percent, a VA funding fee of 1 percent, and
closing costs. Discount points may not be paid in connection with VA financing.
- Lender must apply to VA office for guarantee.
Contact
U. S. Department of Veterans
Affairs
HOME MORTGAGE INSURANCE PROGRAMS
U. S. Department of Housing and Urban Development (HUD)
Federal Housing Administration (FHA)
The Federal Housing Administration (FHA) insures loans made by private lenders, making
lower interest rates or more favorable terms available to borrowers.
Eligibility
- Loans must be made by banks, savings and loan associations, mortgage companies, and
other lending institutions that meet HUD/FHA requirements.
- Prospective borrowers generally must meet cash requirements at closing, must have good
credit records, and must be able to make monthly mortgage payments.
- Loans may be for purchase, refinance and rehabilitation of homes, for cooperative units,
condominium units and manufactured housing.
Program
- A wide range of mortgage insurance programs are available, including programs for low-
and moderate-income borrowers, disaster victims, the elderly, homes on Indian reservations
and on Hawaiian Home Lands, and experimental housing.
- The level of insurance risk, mortgage limits, and types of mortgagors who qualify vary
from program to program.
Contact
U. S. Department of Housing and Urban
Development (HUD)
Federal Housing Administration
INDIAN HOUSING LOAN GUARANTEE PROGRAM
U. S. Department of Housing and Urban Development (HUD),
Section 184
This program guarantees loans for homes owned by Native Americans on trust land or in
Indian or Alaska Native areas.
Eligibility
- The borrower must be an Indian who will occupy the home or an Indian Housing Authority.
- Loans may be used for the construction, acquisition or rehabilitation of one- to
four-family dwellings located on trust land or in an Indian area.
- Tribes must have foreclosure, eviction, and priority of lien procedures.
- Lenders must be approved by the Secretary of Housing and Urban Development, the
Secretary of Agriculture, the Secretary of Veterans' Affairs, or must be supervised,
approved, regulated or insured by any agency of the federal government.
Program
- Loans may be guaranteed for up to 100 percent of the unpaid principal and interest.
- The term of loans is 30 years, with a fixed interest rate.
- Borrowers pay a modest down payment amount and a 1 percent guarantee fee.
- Qualified Mutual Help program participants can use the program to attain home ownership.
Contact
U. S. Department of Housing and Urban
Development (HUD)
INDIAN LOAN GUARANTEE FUND
Bureau of Indian Affairs, Division of Financial Assistance
U. S. Department of the Interior
This fund guarantees business loans made by private lenders to Native Americans and may
provide interest subsidies.
Eligibility
- Applicants must be a federally recognized tribe or Alaskan Native group; a member of
such a tribe or group; or an Indian-owned corporation, partnership or cooperative
association.
- Funds may be used to finance Indian-owned commercial, industrial, or business activities
organized for profit, provided eligible Indian ownership constitutes at least 51 percent
of the business.
- Loans must benefit the economy of an Indian reservation.
- Interest subsidies may be granted when a business is incurring losses.
Program
- Individual guarantees are limited to $350,000; the maximum for tribes or organizations
is $5.5 million.
- The borrower must have minimum equity of 20 percent of project funding in cash or
unencumbered assets to be used in the proposed business.
- Maturities may extend up to 30 years and vary with the use of funds and repayment
capacity of the borrower.
- Interest rates are variable. The maximum interest rate for a 90 percent loan guaranty is
equal to 1.5 percent above the New York prime; the maximum for an 80 percent loan guaranty
is equal to 2.75 percent above the New York prime.
- Interest subsidy amounts are based on the difference between the Treasury interest rate
for direct loans and the interest rate charged by the lender. Subsidies are limited to the
first three years of the loan.
Contact
Bureau of Indian Affairs
RURAL DEVELOPMENT HOME OWNERSHIP LOANS
Rural Development (RD)
U. S. Department of Agriculture
Guaranteed or direct loans are available in rural areas to finance homes and building
sites.
Eligibility
- Eligible borrowers are very low-, low- or moderate-income persons or families.
- Borrowers must be without decent, safe and sanitary housing.
- Borrowers must be unable to obtain a loan with reasonable terms and conditions from
other sources.
- Borrowers must have sufficient income to pay mortgage payments, insurance, taxes, and
living expenses. Persons with inadequate repayment ability may obtain cosigners for the
loan.
- Loans may be used to buy, build, improve, repair or rehabilitate rural homes and related
facilities, and to provide adequate water and waste disposal systems.
- Loans may be used to modernize homes by adding bathrooms, central heating, modern
kitchens and other improvements.
- Under certain conditions, funds may be used to refinance debts on a home.
- Houses must be located on sites where roads, water and waste disposal systems meet RD
requirements.
Program
- Loans may be made for up to 100 percent of the RD-appraised value.
- The maximum repayment period is 30 to 38 years.
- When a borrower's financial position makes him/her eligible to borrow through a
commercial lender, the loan will be refinanced.
Contact
Rural Development
U. S. Department of Agriculture
SBA 7(a) LOAN GUARANTEE PROGRAM
U. S. Small Business Administration
The SBA 7(a) program guarantees repayment to private lenders of a portion of
conventional loans to small businesses.
Eligibility
- Businesses must be operated for profit and must meet SBA size standards.
- Loans must be for expansion, renovation, or construction of new facilities; purchase of
land, buildings, machinery, equipment, fixtures, leasehold improvements, or inventory; or
for working capital or debt refinancing.
- Owner equity of 10 to 30 percent is required for existing businesses; 30 to 50 percent
equity is preferred for companies in a start-up phase.
- Businesses cannot be involved in speculation or investment in rental real estate.
- Applicants must show good character, management expertise and commitment, and ability to
repay the loan.
Program
- The maximum amount of guarantees is $750,000, with an 80 percent guarantee on loans of
$100,000 or less, and 75 percent on loans over $100,000.
- Lenders approved for the SBA Preferred Lenders Program may unilaterally originate loans
with a guarantee of up to 80 percent.
- Loan maturity depends on ability to repay, but is generally five to seven years for
working capital and up to 25 years for real estate.
- Interest rates are negotiable and may be fixed or variable. Loans under seven years have
a maximum rate of prime plus 2.25 percent; seven years or more, maximum 2.75 percent over
prime. Rates for loans under $50,000 may be slightly higher.
- The lender may retain the guaranteed portion of the loan or sell it in the secondary
market.
Contact
Local Bank or
U. S. Small Business
Administration
SBA SPECIAL LOAN PROGRAMS
U. S. Small Business Administration
SBA offers a variety of special loan guarantee programs that are similar in structure
to the basic 7(a) Loan Guarantee program.
- LOW DOCUMENTATION LOANS (LowDoc) provide financial assistance to companies
needing up to $100,000. A one-page application and high-speed fax machine help SBA respond
to applications in three to five working days.
- SMALL GENERAL CONTRACTOR LOANS assist small construction firms with short-term
financing needs. Loan proceeds can be used to finance residential or commercial
construction or rehabilitation of property for sale. Proceeds cannot be used for real
estate used for investment purposes.
- SEASONAL LINE OF CREDIT GUARANTEES assist small businesses with short-term needs
during peak seasons.
- ENERGY LOANS assist firms engaged in manufacturing, selling, installing,
servicing or developing specific energy measures.
- EXPORT REVOLVING LINE OF CREDIT GUARANTEES provide short-term financing for
exporting firms that are at least one year old and are developing or penetrating foreign
markets.
- INTERNATIONAL TRADE LOAN GUARANTEES are available in amounts up to $1 million for
the acquisition, construction, renovation, modernization, improvement or expansion of
facilities or equipment to be used in the United States in the production of goods and
services involved in international trade.
- MINORITY PREQUALIFICATION LOANS are for up to $250,000 and are available in
select geographical pilot sites. The program helps eligible small businesses access
capital through the use of local, private-sector organizations. Eligibility requirements
include businesses that are at least 51 percent owned and managed by a racial or ethnic
minority person(s).
- MICROLOAN PROGRAMS are administered through nonprofit intermediaries selected and
approved by SBA. Short-term loans of up to $25,000 are made to small businesses for a
variety of needs.
Contact
U.
S. Small Business Administration
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