HB-1-3560

CHAPTER 10: SUBSEQUENT LOANS [7 CFR 3560.73] 

AND LOANS FOR FINAL PAYMENTS 

[7 CFR 3560.74]

10.1 INTRODUCTION 

The Agency may extend additional credit to a borrower for a Multi-Family Housing 

project initially financed by the Agency in the form of a subsequent loan. Subsequent loans may 

be made to current borrowers to complete, improve, repair, or make modifications to a MultiFamily Housing project or to finance equity to avert prepayment of a Multi-Family Housing 

project. In special circumstances, a subsequent loan may be used to add units to a project to 

provide access for persons with disabilities. 

As the average age of properties in the Agency’s portfolio increases, Loan Processing 

Staff are likely to encounter a growing number of subsequent loan requests from borrowers who 

have projects with immediate capital replacement needs, but insufficient reserve funds to meet 

those needs. Because subsequent loans increase project debt, the Agency must pay particular

attention to ensuring that projects offer sufficient security to protect both the Agency’s 

subsequent and initial loans in the event of default. 

This chapter provides guidance to Loan Originators in evaluating whether approval of a 

subsequent loan is the appropriate action to take on a project. This evaluation must include an 

analysis of the applicant’s management performance, as well as an analysis of the project’s 

ability to support the additional debt service to cover the subsequent loan. Such an evaluation 

must also be made if a borrower wishes to assume a subsequent loan with non–Agency debt. 

This chapter also covers the circumstances under which the Agency will make 

subsequent loans and describes how the procedures for underwriting and processing these loans 

differ from initial Multi-Family Housing loans. 

A loan request to add units to an existing project because of a need for additional units is 

considered to be a second phase of a project and an initial loan, not a subsequent loan. Such 

loans to add new units compete for funding with all other initial Multi-Family Housing loans and 

are processed and underwritten in the same manner as initial Multi-Family Housing loans. 

10.2 OVERVIEW 

Subsequent loans may be made to current borrowers for a project with Agency financing 

to: 

• Complete, improve, repair, or make modifications to the project. 

• Finance equity to avert prepayments of the project. Such loans are discussed in detail 

in Chapter 15 of HB-3-3560. 

• As a last resort, when modification of existing units is not possible, develop 

additional units to provide access for persons with disabilities. Such units do not 

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compete with other projects under the Notice of Funding Availability (NOFA) 

system. 

A. Loans for Existing Units 

A subsequent loan for existing units might be appropriate to: 

• Complete needed repairs and rehabilitation work; 

• Replace obsolete units (no additional units may be added to the original number of 

units); and 

• Complete a project when there have been unforeseen factors beyond the owner’s 

control, design changes that were required by the Agency or local Government, or 

changes in financing that was approved by the Agency (for example, where the cost 

of completing the project has escalated due to unexpected and prolonged inclement 

weather, which caused excessive delays in constructing the project, or where 

unexpected additional fees have been applied by the local Government). Subsequent 

loan funds may not be used to reimburse an owner for additional contributions that 

were made to complete a project.

If a subsequent loan is made, the borrower equity and initial operating capital 

contribution requirements apply.

• Subsequent loans for repair and rehabilitation do not compete for funding, and 

borrowers can apply for a subsequent loan at any time. 

• The processing of subsequent loans for repair or rehabilitation typically begins when 

the Agency and the borrower identify the need for improvements at a project as a 

result of monitoring or servicing actions. Subsequent loans for this purpose are 

prioritized, selected, and processed in accordance with National Office instructions. 

States must categorize subsequent loan requests in accordance with Paragraph 10.3. 

B. Loans Made with Conventional Financing 

When a borrower wants to obtain a subsequent loan from a conventional lender, the 

Agency must approve the loan. In evaluating whether to approve the loan, the Agency 

will apply the underwriting criteria of applicant eligibility, project eligibility, reasonable 

costs, project feasibility, and security described in Paragraph 10.11. 

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SECTION 1: QUALIFYING FOR SUBSEQUENT LOANS 

10.3 ELIGIBILITY, LOAN PURPOSES, AND PRIORITIES 

A. Project Eligibility 

As soon as it becomes evident that a subsequent loan request may be made, the Loan 

Originator must make an evaluation of the project in accordance with Chapter 6 of HB-3-

3560. This evaluation will determine whether the additional commitment that such a loan 

represents is in the best interest of the Agency and the tenants. If this analysis concludes 

that the project is no longer suitable program property, the subsequent loan must not be 

made. 

B. Eligible Loan Purposes 

The provisions of 7 CFR 3560.53 and 7 CFR 3560.54, describing permitted and 

restricted loan purposes, apply to subsequent loans. Additional guidance specific to 

subsequent loans is provided at 7 CFR 3560.73. 

The annual funding notice to the States, RD Instruction 1940-L, specifies the funds 

available for rehabilitation and new construction. 

C. Repair and Rehabilitation Loan Funds 

Subsequent loan requests for repair and rehabilitation are funded in accordance with 

guidance provided by the National Office. Loan Originators must categorize loan 

requests as follows: 

• Health and safety concerns. Projects with outstanding health and safety 

deficiencies.

• Inventory properties. Projects that are in inventory or that need an additional loan 

to fund an approved workout agreement. 

• Deferred maintenance and Fair Housing compliance. Projects with deferred 

maintenance and Fair Housing compliance deficiencies. 

10.4 DESIGN REQUIREMENTS 

All improvements, repairs, and modifications made as part of a subsequent loan must be 

in accordance with RD Instructions 1924-A and 1924-C. 

The Loan Originator must require that the loan applicant obtain appropriate architectural 

services whenever any of the following conditions exist: 

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• New enclosed habitable space is being added; 

• Architectural services are required by State law; or 

• The Agency determines that the work being performed requires architectural services. 

This should include any work involving the structural, mechanical, plumbing, or 

electrical systems of a residential building, or requires a building permit from a local 

building jurisdiction. 

The specific architectural service should be as deemed appropriate for the type and scope 

of work involved in the project. 

10.5 ENVIRONMENTAL REQUIREMENTS 

Subsequent loans are subject to the same environmental requirements as initial loans. 

Chapter 3 and RD Instruction 1940-G provide further details on environmental requirements. 

10.6 LOAN LIMITS 

The requirements for initial loans regarding loan amounts, borrower equity contribution, 

rates and terms, and initial operating capital as presented in Chapter 5, also apply to subsequent 

loans. The requirements for borrower equity and initial operating capital are specified below. 

A. Borrower Equity Contribution

Loan applicants requesting subsequent loans must make an equity contribution 

consistent with the percentage required for the original loan. When determining the 

necessary equity contribution, any increase in the value of the property since the initial 

loan was made cannot be counted as a borrower equity contribution. However, additional 

initial investment on the initial loan may be credited toward the required investment on 

the subsequent loan. Exhibit 10-1 presents two examples showing the procedures for 

determining a borrower’s required equity contribution. 

B. Initial Operating Capital 

Initial operating capital is required for subsequent loans to complete the original 

project, but is not required for subsequent loans to repair or improve an existing housing 

project.

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10.7 RATES AND TERMS 

Subsequent loans are amortized over a period not to exceed the lesser of the economic 

life of the housing being financed or 50 years, and are paid over a term not to exceed the lesser 

of the economic life of the housing or 30 years from the date of the loan. 

10.8 RESTRICTIVE-USE PROVISIONS 

Projects receiving subsequent loans are also subject to additional restrictive-use 

provisions in accordance with 7 CFR 3560.662. 

Exhibit 10-1 

Calculating Borrower Equity Contributions—Two Examples

Example 1: Borrower Smith has an original loan from the Agency of $712,500, on which he paid a 5%

equity requirement of $37,500. If he were to request a subsequent loan for $50,000, he would be required to 

provide a 5% equity contribution of $2,500 as follows because he has no excess equity in the first loan: 

Calculating initial loan and equity

Security value of initial loan $750,000

Equity contributed to initial loan (5%) $37,500

Initial Agency loan $712,500

Calculating subsequent loan and equity 

Security value of subsequent loan $50,000 

Equity required for subsequent loan (5%) $2,500

Subsequent Agency loan $47,500 

Determining whether equity requirement for 

subsequent loan has been met 

Security value of combined loans $800,000

Total 5% equity required $40,000 

Equity contributed to initial loan $37,500

Balance equity required for subsequent loan $2,500

Example 2: Borrower Jones has an original loan of $712,500, on which he made an equity contribution of

$40,000 (his land was worth $40,000, which is more than the 5% contribution required). If he were to obtain 

a subsequent loan for $50,000, he would not be required to contribute any additional equity, since the $2,500 

he would ordinarily be required to contribute was already provided as part of the original loan:

Calculating initial loan and equity

Security value of initial loan $750,000

Equity contributed to initial loan (5%+) $40,000

Initial Agency loan $710,000

Calculating subsequent loan and equity 

Security value of subsequent loan $50,000 

Equity required for subsequent loan (5%) $2,500

Subsequent Agency loan $50,000 

Determining whether equity requirement for 

subsequent loan has been met 

Total security value of combined loans $800,000

Total 5% equity required $40,000 

Equity contributed to initial loan $40,000

Balance equity required for subsequent loan $0

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A. Extension of Restrictive-Use Provisions 

It is the Agency’s policy that in exchange for providing Agency financing to a project 

through a subsequent loan, the project should be made available for low-income

occupancy for an extended period beyond what the initial loan required. When a 

subsequent loan is made, a new 20-year restrictive-use period on the project begins as of 

the date of loan closing. 

B. Prepaying Projects 

Subsequent loans made to nonprofit organizations or public agencies to avert 

prepayment or to finance equity to avert prepayment will be subject to the restrictive-use 

provisions established in 7 CFR part 3560, subpart N and described in Chapter 15 of HB3-3560. These restrictions require the borrower to continue housing eligible very low-, 

low-, and moderate-income households for the remaining useful life of the project; unless 

the Agency determines that there is no longer a need for the project. 

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SECTION 2: APPLICATION SUBMISSION AND PROCESSING 

10.9 ACCEPTING APPLICATIONS 

Subsequent loans for repairs or rehabilitation are funded from a separate allocation and 

do not compete for funding with new construction loans under the NOFA system. These requests 

are prioritized and funded at the National Office level in accordance with guidance provided by 

the National Office. Nevertheless, the Loan Originator must complete underwriting as would be 

done for any other loan to ensure the Agency’s security and to establish the need for and 

eligibility of the loan under program requirements. 

To complete the necessary underwriting, the Loan Originator must require the submission 

of the documentation and forms listed in Exhibit 10-2. 

Exhibit 10-2 

Documentation to be Submitted for a Subsequent Loan 

to Complete, Improve, Repair, or Modify an Existing Project 

• Form SF 424 A, Application for Federal Assistance;

• Form RD 1944-37, Previous Participation Certification;

• The method of financing construction; 

• Drawings, specifications, and a contract document that meets the requirements of 

Paragraph 9.10 B; 

• The estimated total development cost, the cost per unit and the estimated loan amount 

(Form RD 1924-13, Estimate and Certificate of Actual Cost);

• Scope of work (not necessary for loans to complete a project); 

• Signed statement regarding cost overruns; 

• Information on architectural, engineering, and legal services and proposed contractor; 

• Forms RD 3560-30, Certification of No Identity of Interest (IOI) and RD 3560-31,

Identity of Interest Disclosure/Qualification Certificate; 

• Change in related assistance; 

• Detailed operating budget (Form RD 3560-7, Multiple Family Housing Project 

Budget/Utility Allowance);

• Demonstrated ability of cooperative to self-manage, if applicable; 

• Updated financial statements; and 

• Form RD 1910-11, Applicant Certification Federal Collection Policies for Consumer or 

Commercial Debts.

When a borrower wants to apply for a subsequent loan for repair and rehabilitation, the 

Loan Originator must send the borrower a formal letter that: 

• Lists all information required for a subsequent loan application (see Exhibit 10-2); 

• Includes all forms that the applicant must complete and return; 

• Specifies the deadline by which the information and forms must be returned; 

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• Defines what constitutes a complete application (all information and forms are 

submitted, and all forms are signed); and 

• Invites the applicant to attend a meeting to discuss the subsequent loan application 

with the Loan Originator. 

10.10 SETTING DEADLINES AND EVALUATING COMPLETENESS 

A. Submission Deadlines 

While subsequent loans to repair or rehabilitate existing units are processed in 

accordance with loan priorities established by the National Office, Loan Originators 

should set submission deadlines based upon the timing of the subsequent loan request. 

However, any deadlines must allow the applicant reasonable time to gather and prepare 

the necessary documentation, which is generally at least 30 days. 

Once the deadlines have been established, the Loan Originator must inform the 

applicant that failure to meet the deadlines may result in the applicant losing their place 

in line for funding or may cause the applicant to face serious servicing consequences as a 

result of the repair and rehabilitation work being delayed. Chapter 10 of HB-3-3560 

describes the servicing consequences in detail. 

B. Completeness Requirements 

To be considered complete, loan applications must meet the following requirements: 

• All information detailed in Exhibit 10-2 must be completed; and 

• All required forms must be signed. 

10.11 UNDERWRITING 

As for all loans, the Loan Originator must underwrite the loan to make sure that it is 

consistent with applicable program requirements and can be supported by the project. When 

underwriting applications for subsequent loans, Loan Originators will follow the basic 

procedures presented in Chapters 4 and 5. 

To approve a subsequent loan application, the Loan Originator’s underwriting analysis 

must show that the loan meets the Agency’s underwriting standards. When underwriting the 

loan, the Loan Originator determines whether: 

• The applicant is eligible for the loan; 

• The project is eligible for the loan; 

• The proposed project costs are reasonable; 

• The proposed project is financially feasible; 

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• The Agency’s interests are secure; and 

• The project meets suitability requirements in accordance with Chapter 6 of HB-3-

3560. 

The underwriting analysis for subsequent loans differs in several respects from the 

analysis for initial loans. 

A. Applicant Eligibility 

Applicants for subsequent loans must be current borrowers under the program and 

must meet all eligibility requirements. 

B. Project Eligibility 

A project must meet the eligibility requirements described in Chapter 4 for it to be 

eligible for a subsequent loan. However, the following rules apply with respect to the

location of a project requesting a subsequent loan: 

• A project for which a subsequent loan will be used to make necessary repairs or

improvements to the property or to avert prepayment may be located in an area that 

has changed from rural to nonrural and need not be in a designated place.

• The Administrator may approve a subsequent loan in a place that is not on the list of 

designated places as a servicing action. 

C. Reasonable Costs 

As for all Agency loans, the projected costs as shown on Form RD 1924-13 must be 

reasonable and comparable to costs of similar work done in the area. The guidance 

provided in Chapter 3 applies in making this determination. If the evaluation shows that 

project costs are not reasonable and comparable, the applicant should be contacted to 

determine whether project costs can be reduced to a level determined to be reasonable. If 

not, the Loan Originator must not recommend approval of the loan. 

D. Project Feasibility 

1. Appropriate Scope of Work? 

For subsequent loans for repairs or rehabilitation, the Loan Originator must schedule 

a unit-by-unit inspection of the project as part of the underwriting process. When 

possible, the State Architect should participate in this inspection and review the cost 

estimate and scope of work. The purpose of the inspection is to determine whether: 

• The loan is necessary; 

• The loan is for a correct amount; and 

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• The scope of work is appropriate. 

2. Financial Feasibility 

When evaluating a subsequent loan request for rehabilitation, the Loan Originator 

must determine whether the project has the financial capacity to support the additional 

debt service. For projects that have been experiencing vacancies, financial feasibility 

should be closely examined. If the project is experiencing financial difficulties due to 

market conditions or poor management, the subsequent loan should not be approved 

because it could result in additional loss to the Government. In making this 

determination, the Loan Originator may take into account the past performance of the 

loan applicant and the extent to which the applicant has exhibited the ability and intent to 

effectively manage the project. If the applicant has a history of poor performance at 

managing the property, the loan should not be approved, and some other servicing action, 

such as a transfer or workout agreement, should be considered. Chapters 7 and 10 of HB3-3560 provide details on these servicing actions. 

Adequacy of Security

Example 1. Borrower Johnson has 

applied for a subsequent loan in the amount of 

$350,000 to make repairs and improvements. 

His current outstanding debt to the Agency is 

$500,000. The appraisal comes back valuing 

the property with improvements at $650,000, 

therefore only supporting a loan of $150,000

($650,000 – $500,000). The project does not 

provide sufficient security to support the 

$350,000 loan. The Loan Originator may

recommend approval of a $150,000 loan.

Example 2. Borrower Olson has applied 

for a subsequent loan in the amount of 

$350,000 for repairs. Her current outstanding

debt to the Agency is $600,000. The appraisal 

comes back valuing the property with 

improvements at $1 million. The Loan 

Originator may recommend approval of the 

$350,000 loan. 

In considering any subsequent loan, the Loan Originator must establish that the 

project rents will be able to withstand 

the additional debt that will be placed 

on the project by the subsequent loan. 

The Loan Originator must analyze the 

budget in Form RD 3560-7 submitted

with the loan request and determine 

that the subsequent loan will not 

require rents to increase by so much 

that they become unaffordable to 

existing tenants based on their incomes 

and the availability of rental assistance, 

and will not exceed the Conventional 

Rents for Comparable Units (CRCU) 

standard. The Agency may only 

approved rents above the CRCU in 

limited circumstances, as described in 

Chapter 3, paragraph 3.20 B. 

E. Security

1. Adequacy of Security 

The Loan Originator must evaluate 

whether the project can generate sufficient income at rents affordable to the tenants and 

not in excess of CRCU to cover the additional expense of the additional debt service 

required by a subsequent loan. If this is not possible, the Loan Originator must not 

recommend approval of the loan. In such an event, some other servicing action in 

conjunction with the subsequent loan, such as a transfer or workout agreement, must be 

initiated. Chapters 7 and 10 of HB-3-3560 provide details on these servicing actions. 

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2. Participation Loans 

When an applicant is planning to use other funds or financing in conjunction with a 

subsequent loan from the Agency, the requirements and procedures of Chapter 6. 

10.12 LOAN APPROVAL AND CLOSING 

A. General Procedures

Loan Originators will follow the loan approval and the loan closing procedures 

detailed in Chapter 8. 

B. Implementing Restrictive-Use Provisions 

The required restrictive-use language for subsequent loans to repair and rehabilitate 

projects must be appended to the mortgage referencing all notes. The term of the new 

provisions begins on the date of loan closing. 

10.13 RELOCATION PLANS 

Subsequent loans that are made for major repair and rehabilitation may require the 

temporary relocation of tenants while the project is undergoing work. The applicant must 

provide a plan and financial assistance for relocation of displaced persons from a site on which a 

project will be located. Paragraph 3.19 details the requirements for relocation plans and 

assistance. 

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SECTION 3: FINAL PAYMENTS 

10.14 FINANCING FINAL PAYMENTS 

The Agency may finance final payments for borrowers holding existing loans for which 

the Agency approved an amortization period that exceeded the term of the loan. 

Financing may be made if current market studies show that a need for low-income rental 

housing still exists for that area and one of the following conditions has been met: 

• It is more cost efficient and serves the tenant base more effectively to maintain the 

current project than to build a new project in the same location; or 

• The project has been maintained to such an extent that it warrants retention in the 

current portfolio because it can be expected to continue providing decent, safe, and 

sanitary affordable rental units for the term of the new loan. 

The term of the Agency financing for final payments will not exceed 20 years. 

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