HB-1-3565

3.1 INTRODUCTION

The underwriting of a loan is the 

process by which the lender determines 

whether the loan is a good investment of 

capital. The process involves a 

simultaneous analysis of the 

creditworthiness of the borrower and the 

economic value of the property as an 

income-producing investment. If the 

borrower is creditworthy and the property 

has sufficient value under existing market 

conditions, the lender can enter into the loan with reasonable confidence that the investment will 

be a good one. The underwriting of a loan guaranteed by the GRRHP involves the same 

feasibility analysis that the lender uses for any other loan. The only difference is that the GRRHP 

guaranteed loan will have property use restrictions that must be factored into the underwriting 

analysis.

This chapter brings together the borrower eligibility, property, and loan requirements of 

the GRRHP that must be a part of the lender underwriting analysis. In evaluating each 

transaction, the lender must use their own loan policy processes and procedures and prudent 

underwriting standards, consistent with the best industry practices and with the requirements set 

forth in this chapter.

SECTION 1: LENDER UNDERWRITING RESPONSIBILITIES

3.2 OVERVIEW

Prior to requesting a loan guarantee, the lender must underwrite and approve the loan. 

The underwriting analysis is a detailed evaluation of key elements of borrower experience and 

creditworthiness, market conditions, the value of improvements, and the ability of the property to 

attract the rents needed to generate sufficient cash flow to support the loan’s debt service. The 

lender underwriting must identify and evaluate all the factors that could affect loan performance. 

Such factors must be reflected in the underwriter’s conclusions detailed in the lender’s narrative. 

The lender will underwrite the GRRHP guaranteed loan as prudently as any other loan in their 

portfolio.

3-1 

(02-23-12) PN 455 

Revised (03-15-17) PN 495 

CHAPTER 3: LENDER UNDERWRITING

Key Topics in this Chapter

• Lender Responsibilities

• Lender’s Underwriting Conclusions

• Borrower Eligibility Requirements

• Property Requirements

• Financing Terms and Lender Commitment

• Determining Property Value
HB-1-3565 

3.3 SUMMARY OF LENDER RESPONSIBILITIES

The lender’s underwriting responsibilities can be summarized as follows:

• Review borrower’s qualifications and capacity to own and operate the property in 

accordance with the loan terms and program requirements;

• Approve the plans and specifications for the construction of the property; 

• Approve the construction and lease-up schedules for the property; 

• Determine that there is a market for the project – that is, that there is demand for 

additional rental units of the type proposed at market rents or at the proposed rents, if 

higher; 

• Determine the expense amounts and the amount of replacement reserves;

• Determine the appropriate debt service coverage ratio;

• Review the management plan and management agreement for the management of the 

property; 

• Ensure that all materials prepared by outside parties such as appraisers, architects, 

attorneys, environmental consultants, engineers, or cost estimators are adequate for 

their intended purpose and comply with Agency requirements; and 

• Determine the value of the property. 

SECTION 2: LENDER NARRATIVE

3.4 NARRATIVE REQUIREMENTS 

The lender must submit a complete 

narrative summary of all of the factors 

affecting the transaction and provide 

supporting documentation for all decisions 

made in underwriting the loan. This will be 

submitted as part of the loan guarantee 

application (see Section 3 of Chapter 4). The 

lender is expected to identify those factors that 

may impact the performance of the loan. The 

lender’s underwriting narrative must include 

the following elements:

3-2 

Outline of Lender’s Narrative

• Summary of Loan Request

• Financing Terms/Commitment

• Borrower/Sponsor’s Qualifications

• Management Review

• Property History

• Site/Area/Neighborhood Analysis

• Improvements/Physical Needs

• Environmental Issues

• Market Analysis/Appraisal

• Income/Expense Proforma

• Valuation
HB-1-3565

• A summary of the loan guarantee request, including under which option the loan is 

being guaranteed, the amount of the loan, guaranteed portion, and any subordinate 

financing;

• Conclusions about the borrower, including eligibility, financial capacity, and 

management review;

• Property history and loan purpose, including prior ownership and any outstanding 

financing;

• Conclusions about the property, including site and neighborhood analysis; 

• A summary of any needed or planned improvements or physical needs.

• A summary of known or potential environmental concerns; and

• A determination of the project’s value, including market analysis, appraisal, income 

and expense analysis, and valuation.

While the lender is expected to use their experienced judgment in making a determination 

of value and developing financing terms, lenders must consider their own loan policy processes 

and procedures in addition to the Agency underwriting guidelines contained in the following 

sections of this chapter in making loans for Agency guarantee.

SECTION 3: BORROWER ELIGIBILITY

3.5 OVERVIEW

The borrower's intentions, qualifications, and capabilities are crucial to maintaining 

housing that is decent, affordable, and financially sound. Lenders must determine that the 

borrower is an eligible borrower for the Guaranteed Rural Rental Housing Program. Lenders 

must determine that the borrower is financially and legally capable of meeting all program 

requirements and has a good record of compliance with Agency and other Federal program 

requirements and financial obligations. In reviewing borrower eligibility, the lender must 

examine the background and capabilities of all of the principals of the ownership group. 

3.6 ELIGIBLE BORROWERS

Eligible borrowers include individuals, corporations, state or local public agencies or an 

instrumentality thereof, partnerships, limited liability companies, trusts, Indian tribes, or any 

organization deemed eligible by the Agency.

To be considered eligible, the borrower must:

• Be a creditworthy entity. Borrowers who own any other business or engage in other 

business activities are eligible to participate in the program. However, the borrower 

must operate as a single asset entity, unless otherwise approved by the Agency. 

3-3

(02-23-12) PN 455

Revised (07-21-23) PN 588
HB-1-3565

• Be able to maintain and operate rental housing in accordance with program objectives 

and requirements.

• Be in compliance with all legal and regulatory requirements with respect to any 

Agency program and any other Federal debt.

• Be a U.S. citizen(s) or permanent legal resident(s), a U.S. owned corporation, a 

limited liability company, or a partnership in which the principals are U.S. citizens or 

permanent legal residents.

The lender can establish the citizenship or permanent legal residency of a borrower by 

examining a birth certificate, passport or by any other method. If the borrower is not a U.S. 

citizen, the borrower must provide acceptable evidence of eligible status as a permanent legal 

resident, as listed in Exhibit 3-1.

3.7 INELIGIBLE BORROWERS

Borrowers are not eligible to receive Agency loan guarantees if:

• The borrowing entity or any one of its principals has been debarred by the Agency 

from future participation in any federal credit program; or

• The borrowing entity or any one of its principals has defaulted on any Federal debt.

• The borrowing entity or any of its principals has a relationship with the lender that 

violates the GRHHP’s Lender’s Agreement. In cases where there is an established 

relationship, there must be a separation of duties.

In accordance with 2 CFR §180.300, lenders must verify and provide 

documentation to the Agency that the borrowing entity and the borrowing entity’s 

principals are not excluded or disqualified by:

(a) Checking SAM Exclusions (https://sam.gov); or

(b) Collecting a certification; or

(c) Adding a clause or condition to the covered transaction.

3.8 BORROWER TYPES

The lender must determine that the type of borrower is appropriate to carry out the obligations 

under the loan and GRRHP requirements. Other than public agencies, Indian tribes, and 

individuals, borrowers must provide documentary evidence that they are valid legal entities, 

licensed to do business in the state in which the property is located and able to enter into 

agreements governing the loan and guarantee. The following are examples of eligible borrower 

types and the documentation, including any amendments that they must provide to prove their 

legal status for a GRRHP loan.

3-4
HB-1-3565

3-5 

(02-23-12) PN 455 

Revised (07-21-23) PN 588 

Exhibit 3-1 

Acceptable Evidence of Permanent Legal Residency

• Form I-551,” Alien Registration Card” or prior to 1979, Form I-151 “Alien Registration 

Receipt Card” (for permanent resident aliens).

• Form I-94, “Arrival-Departure Record”, with one of the following annotations:

◊ “Admitted as Refugee Pursuant to Section 207”;

◊ “Section 208” or “Asylum”;

◊ “Section 243(h)” or “Deportation stayed by Attorney General”; or

◊ “Paroled Pursuant to Section 212(d)(5) of the Immigration and Nationality Act (INA)” for 

a period of at least a year. 

• If Form I-94 is not annotated, it should be accompanied by one of the following documents:

◊ A final court decision granting asylum (but only if no appeal is taken);

◊ A letter from an asylum officer of the U.S. Immigration and Naturalization Service (INS) 

granting asylum (if application is filed on or after October 1, 1990) or from an INS district 

director granting asylum (if application filed before October 1, 1990);

◊ A court decision granting withholding of deportation; or

◊ A letter from an INS asylum officer granting withholding of deportation (if application 

filed on or after October 1, 1990).

• An alien who is granted conditional entry pursuant to section 203(a)(7) of the INA as in effect 

prior to April 1, 1980, is a qualified alien.

• A receipt issued by the INS indicating that an application for issuance of a replacement 

document in one of the above-listed categories has been made, and the applicant’s entitlement 

to the document has been verified.

• If other documents are determined by the INS to constitute acceptable evidence of eligible 

immigration status, they will be announced by a notice published in the Federal Register. 
HB-1-3565

A. General or Limited Partnerships

A partnership is a business agreement between one or more managing or general 

partners and one or more limited or equity partners, organized to carry out the activities 

related to ownership and operation of rental housing, or similar purposes. Partnerships 

must provide evidence of legal status in the form of a partnership agreement setting forth

the terms of the business relationship. The partnership must be for a term at least equal to 

the term of the loan.

Lenders must verify that the partnership structure will ensure the sound ownership and 

management of the project over the life of the loan. Lenders must review and approve 

any changes in the partnership structure.

• The terms of any limited partnership agreement must require that the general partners 

maintain a minimum of five percent financial interest in the residual or refinancing 

proceeds of the partnership.

• Any limited partnership agreement must contain a clause that provides for obtaining 

prior consent from the lender when any of the following actions are taken:

◊ Withdrawing a general partner;

◊ Adding a general partner;

◊ Substituting a general partner;

◊ Amending the Limited Partnership Agreement or the Partnership’s Certificate of 

Limited Partnership;

◊ Selling all or substantially all of the assets of the partnership;

◊ Dissolving or terminating the partnership; and

◊ Borrowing funds from the general partners or third parties.

B. Corporations

A corporation is a for-profit or non-profit organization created for the purpose of 

owning and operating rental housing or similar purposes. Corporations must provide 

evidence of legal status in the form of Articles of Incorporation. Corporate owners must 

clearly identify the officer(s) responsible for managing the ownership responsibilities of 

the GRRHP project and must be in good standing with state of incorporation and where 

the project will be built.

Non-profit corporations may receive preference in ranking and are not subject to 

the same equity requirement as for-profit entities. Non-profits must provide evidence of 

their status in the form of:

3-6
HB-1-3565

• A tax-exempt ruling from the Internal Revenue Service (IRS) designating the nonprofit as a 501(c) or 501(c)(4) organization; and

• A purpose statement in their Articles of Incorporation which includes a provision to 

provide decent housing that is affordable to low- and moderate-income persons.

C. Limited Liability Companies (LLC)

An LLC is a legal entity created to own and operate rental housing, or for a 

similar purpose, and that is structured to provide limited liability in the ownership of real 

property. LLCs must provide evidence of legal status in the form of Articles of 

Organization and Operating Agreements. These documents must show that:

• The authority of the members of the LLC is limited, and an authorized member who 

will act on the LLC’s behalf has been appointed;

• The management functions of the LLC are the responsibility of a member who holds 

at least a five percent financial interest in the LLC;

• The LLC has agreed that any new members may only be brought into the 

organization with prior consent of the lender; and

• At least one member has committed to meet the equity contribution requirements if 

the LLC partnership is not able to do so at the time of loan request.

D. Trusts

A trust is an entity formed by a legal agreement for the purpose of owning and 

operating rental housing or for a similar purpose. Organizational documents of legal 

status should be submitted as evidence.

E. Public Agencies

Public agencies are organizations, including State or local housing finance 

agencies (HFAs) or public housing authorities or agencies (PHAs), organized to finance

and/or own and operate affordable rental housing, or similar purposes. Public agencies 

must provide evidence of legal status in the form of State or local enabling or 

implementing legislation or a resolution of an official public body authorizing the

creation of the agency.

F. Indian Tribes

Indian tribes are legal entities recognized by the Federal government as 

representing the legal interests of tribal members. Indian tribes must provide evidence of 

legal status in the form of a certificate or other official document of recognition from the 

Interior Department or other authorized agency of the Federal government. Only those 

entities that meet the definition of "Indian tribe" as provided in the Glossary are 

considered eligible.

3-7

(02-23-12) PN 455

Revised (03-15-17) PN 495
HB-1-3565

G. Individuals

An individual borrower is any citizen or permanent legal resident of the United 

States aged 18 years of age or older who has the capacity to enter into a legal agreement 

to own and operate rental housing. Citizenship status of individuals is addressed in 

Paragraph 3.6.

3.9 CERTIFICATION OF LEGAL ELIGIBILITY

The borrower’s attorney must review the organizational documents of the borrower, each 

principal that is an entity, and the organizational documents of any entity that has an ownership 

interest in a principal and certify that the borrower meets Agency and program requirements. 

The lender must review this certification for compliance with program requirements.

3.10 BORROWER EXPERIENCE AND CAPACITY

Lenders must verify that borrowers have the experience and capacity to develop and

operate the property to the standards established by the lender and the program.

Areas to be reviewed by the lender:

• The number and types of projects that the borrower has previously undertaken.

• The experience of the borrower in completing projects.

• The borrower’s financial resources and management capacity to undertake the project 

and resolve problems that arise over the course of the loan.

The lender must be able to verify that:

• The borrower can construct or rehabilitate rental housing;

• The borrower can provide for the financially sound operation of the property over the 

life of the loan; and

• The borrower is legally able to enter into the necessary contracts with the builder, 

lender, and other parties involved in the development, financing, and operation of the 

property.

A. Construction and Rehabilitation Experience

The development team includes the people who will build or rehabilitate the real 

estate. The development team must have experience with the type of construction 

involved and a history of sound performance. The lender must review and certify as 

acceptable each member of the development team. The core development team usually 

consists of the developer, architect, and contractor.

3-8
HB-1-3565

• The developer is the owner or borrower entity and the party with ultimate 

responsibility for getting the project completed. The developer coordinates or directs 

an agent to coordinate the work of other members of the development team. To 

demonstrate qualifications, the developer must provide a narrative description of its 

organization, including its history, approximate annual operating budget, staff size, 

resumes of key staff members, and if applicable, information about the board of 

directors. This narrative should also include a factual description of the developer’s 

experience in residential real estate activities (i.e., the number and type of projects 

and units built, total square footage, the total cost of the projects and source of 

financing, and pending litigation or mechanic’s lien claims or contingent liabilities).

• The architect is responsible for the design of the project and for monitoring 

construction to ensure that it meets Agency requirements. The architect must provide 

a narrative about his/her firm that includes the history of the firm, professional staff, 

annual revenue, and experience designing similar projects.

• The contractor is responsible for construction of the project. The contractor must 

provide a narrative about his/her construction company including the history of the 

company, annual revenue, and track record in building projects of this type and size 

and pending litigation or mechanic’s lien claims or contingent liabilities. 

B. Property Management Experience

The property manager and the management plan are crucial to the financial 

viability of rental housing projects. The lender must thoroughly evaluate the experience 

of the property manager, whether the borrower or a management agent. Particular 

attention should be given to:

• Knowledge of property management and marketing practices;

• Experience managing rental housing properties, with emphasis on similar properties 

and those managed in the same geographic area as the subject property; and

• Submission of an appropriate and comprehensive management plan and clear 

procedures for meeting the objectives of the plan.

If the borrower does not manage the property, a written management agreement 

must be executed with a qualified management company. The management agreement 

must clearly state the responsibilities of the management agent, the amount of 

management fees to be paid, and how fees are determined. If the property management 

agent or management plan is inadequate to the Agency, the loan will not be eligible for a

guarantee by the Agency.

3-9

(02-23-12) PN 455

Revised (09-07-22) SPECIAL PN 
HB-1-3565

Additional information about the elements of an acceptable management plan and an 

acceptable management agreement are included in Chapter 8.

C. Financial Capacity

The borrower and its principals must be financially stable and have sufficient 

resources to develop and operate the property. Credit reports will assist in determining 

the financial stability of the borrower and will be ordered for the borrower as well as any 

person having a financial interest greater than .001 percent in the property. If the 

organization is newly formed and has not established any records of its activities as an 

organization, credit reports will be ordered on the principal members, stockholders and/or 

partners who hold at least a .001 percent interest in the property. Individual credit reports 

may subsequently be requested on these persons. If an organization has substantial 

interest in another organization, (i.e. tax credit investors) a credit report for such other 

organization may be obtained in the same manner as for the borrower. The borrower 

must demonstrate the financial resources to meet the specific requirements of the 

transaction.

The lender is responsible for verifying that the borrower has the cash and other 

marketable securities needed to close the loan and meet working capital requirements.

The borrower must meet the following equity and reserve requirements.

• Equity Requirement. In the case of a for-profit entity, the borrower must commit

equity capital in an amount equal to at least 10 percent of the total development cost.

In general, total development cost includes the cost of constructing, purchasing, 

improving, altering, or repairing new or existing housing and related facilities and

purchasing and improving the necessary land. Other items may be approved on a 

case-by-case basis by the Agency. In the case of a non-profit entity, the borrower 

must have equity capital in the amount of at least 3 percent of the total development 

cost. In either case, a deferred developer’s fee cannot be used to fulfill the equity 

requirement. Equity must be in place prior to closing the construction loan note 

guarantee or the permanent loan note guarantee. Equity will be in the form of cash or 

value in the land being developed. On a case by case basis, the Agency at its sole 

discretion may consider and approve alternative financial instruments to meet equity 

requirements. 

• Program Reserve Requirements. In addition to equity capital, the 

borrower must commit working capital to meet the program requirements 

for these reserves: an Operating and Maintenance Reserve (O&M Reserve), 

a Contingency Reserve during construction, an initial deposit to the 

Replacement Reserve, and an Interest Credit Reserve (if applicable) to be 

established prior to closing or conversion to permanent depending on the 

Option. None of these reserve requirements are mortgageable costs. The 

establishment of the reserves will not be waived.

3-10
HB-1-3565

◊ O&M Reserve 

The O&M reserve is applicable under Guarantee Options One (permanent 

financing only guarantee), Two (construction advances and permanent financing 

guarantee), and Three (continuous guarantee). The O&M reserve will be at least 

two percent of the loan amount. The Agency may request additional O&M 

reserves if rent-up assumptions indicate the need for more reserves. The sources 

of the O&M reserve must be shown in the construction budget with a schedule of

when the funds will be disbursed in the case of a construction loan note guarantee

or will be funded prior to the closing of the permanent loan in the case of a 

permanent loan note guarantee. Funds contributed as O&M reserve funds will be 

contributed from the borrower’s own resources and are not to be included as part 

of the total development cost (TDC) calculation. If Low-Income Housing Tax 

Credit (LIHTC) funds are being used to fund the Agency required O&M reserves, 

the TDC calculation must be reduced by the amount that is used to fund the O&M 

reserve.

Under guarantee Options One (permanent financing only guarantee) and Two

(construction advances and permanent financing guarantee), funds for the O&M 

reserve may be contributed to the project upon the closing of a permanent loan.

Under Option Three (continuous guarantee), the O&M reserve will be set up and 

fully funded prior to or at the closing of the construction loan. The funds will be 

deposited to the project's general operating account and lose their identity as 

O&M funds. The funds will not be returned except as a "surplus cash distribution"

at the end of the year and only if the requirements of Paragraph 7.7 E. have been 

met.

The items that are typically funded by the original O&M reserve amount 

include, but are not limited to, property and liability insurance premiums, fidelity 

bond premiums when the borrower is also the property management organization, 

utility installation charges and deposits, maintenance equipment, lease forms, loan 

payments that may become due during construction, purchase of office equipment 

and furniture, community room furnishing, other movable equipment and 

furnishing, congregate items, advertising expenses, management fees, 

etc. Agency staff should verify that the initial payment for O&M reserves has 

been made in accordance with the Reserve Account Agreement or any other 

mortgage document governing O&M reserve accounts.

 In lieu of a cash contribution for the O&M reserve, the lender may accept an 

unconditional and irrevocable letter of credit that is issued by another lending 

institution in an amount that is at least equal to the required O&M contribution 

level (at least two percent of the loan amount). The letter of credit must remain in 

3-11

(02-23-12) PN 455

Revised (09-07-22) SPECIAL PN
HB-1-3565 

effect until the borrower has submitted an annual audited financial statement of 

the property to the lender (covering at least a six-month period), and the lender 

has determined that the property is in good financial and physical condition and in

compliance with the regulatory agreement. If these requirements are not met, the 

letter of credit must be extended for an additional year and until the requirements 

can be met.

◊ Lease-Up Reserve 

GRRHP offers the option of establishing a lease-up reserve in lieu of the 90% 

occupancy for 90 continuous days within the 120-day period immediately 

preceding the issuance of the permanent guarantee. The Conditional 

Commitment must state the permanent guarantee will not go into effect until 

EITHER the lender provides RHS staff with copies of rent rolls showing 

occupancy levels at 90 percent for 90 consecutive days (90/90 test) or the lender 

fully funds a lease-up reserve using the calculation below. Once one of these 

occur, the Agency will issue the lender written confirmation of the effective date 

of the guarantee on the permanent loan. 

If the lender opts to set up the lease-up reserve (in lieu of 90% occupancy for 

90 continuous days), it must be established as follows:

(1) For Options 1 and 2 - the funding schedule for the lease-up reserve must 

be included in the Agency-approved construction budget and be fully funded 

before the issuance of the permanent guarantee.

(2) For Option 3 - the lease-up reserve must be funded 30 days before the first 

Certificate of Occupancy is anticipated.

The lease-up reserve must be equal to or greater than an amount established 

by the Agency in a written notice. To calculate the required lease-up reserve 

amount, add the monthly amount of the Operations and Maintenance expense, the 

monthly amount of the Debt Service, and the monthly amount of the Reserve 

Deposit, then multiply this sum by three. 

Lease-up Reserve Formula:

(Monthly O&M Expense + Monthly Debt Service Amount + 

Monthly Reserve Deposit) x 3 = Minimum Required 538 Lease-Up 

Reserve Amount. 

This cash contribution is an additional amount, over and above the required initial

O&M reserve contribution. Loan proceeds, project funds or a borrower 

contribution may be used to establish the lease-up reserve account. 

If a lease-up reserve is established, the lease-up reserve funds may be 

released after six months of sustainable occupancy. Sustainable occupancy is 

when the approved underwritten occupancy rate is sustained for six consecutive 

months. The lender must request and receive Agency approval prior to releasing 

the funds. The lender must provide evidence (i.e. certified rent rolls or 

certification from the borrower), that the project has obtained sustainable 

3-12 
HB-1-3565

occupancy. If loan proceeds or project funds were used to establish the lease-up 

reserve account, the funds must be deposited into the project’s reserve account

upon release. If an owner contribution was used to establish the lease-up reserve 

account, the funds may be released to the borrower.

◊ Contingency Reserve

When the Agency is guaranteeing the construction draws [as well as the 

permanent loan], the Agency requires the construction contingency reserve to be 

set at a minimum of two percent of the construction contract, inclusive of the 

contractor’s fee and hard and soft costs. This reserve is required under Options

Two and Three.

The construction contingency reserve will be set up and fully funded as a cash 

contribution prior to or at the closing of the construction loan. The construction 

contingency reserve will be held and managed by the lender. The disbursement of 

funds from the construction contingency reserve will be made by the lender only

for change order requests approved by the lender and an Agency representative.

Unused funds from the construction contingency reserve transferred to the 

O&M reserve cannot be released until the project reaches occupancy of 90% for

90 days at the underwritten NOI and all reserves remain fully funded. This 

requirement remains in effect notwithstanding that the lender has established an 

additional Lease-Up/Conversion reserve in lieu of the occupancy requirement as 

provided in Chapter 4.19. 

The lender at its own discretion, may release unused funds in the 

construction contingency reserve to the borrower after all other reserve 

accounts are fully funded, construction/punch list items are complete,

certificates of occupancy have been issued, all lien releases have been

obtained, and the Agency’s final inspections have taken place and are 

satisfactory. If the lender decides not to release the unused funds to the 

borrower then it must transfer those funds to the O&M account and inform the 

Agency. If any portion of the construction contingency reserve funds are used 

during the construction period, those remaining funds will be transferred to the 

O&M reserve account and will lose its identity as construction contingency 

funds.

3-13

(02-23-12) PN 455

Revised (04-24-23) PN 581
HB-1-3565

◊ Interest Credit Reserve (if Applicable)

The interest credit reserve is to be established in order to pay the interest 

credit to the project in its first year of operations in lieu of the actual interest

credit payments which are made in January of each year. The interest credit is 

payable annually in arrears after the first day of January following the project’s 

first amortization payment. The interest credit reserve will be reimbursed to the 

borrower within 60 days of receipt of the interest credit payment to the lender.

◊ Initial Deposit to the Replacement Reserve

The Capital Needs Assessment and Capital Improvement Plan may 

call for a replacement reserve escrow that requires an initial deposit to the 

replacement reserve. The reserve account balance must meet or exceed a

$1,000/unit threshold by year three. Such an initial deposit is typically 

associated with a rehabilitation project and not with new construction. See 

Paragraph 7.13 for further details. For new construction projects, the

reserve deposit will be based upon local fixture costs, age, and conditions.

SECTION 4: PROPERTY REQUIREMENTS

3.11 OVERVIEW

To achieve long term success, GRRHP projects must be competitive with other rental 

properties in their market area. Property characteristics such as location, size, amenities, and

environmental conditions are important to the success of a rental housing project. Each of these

characteristics affects a property’s marketability, financial success, and value.

Ensuring that certain minimum property standards are met is important to maintaining the 

ability to remain competitive and financially viable over the long term. In evaluating property, 

lenders are expected to evaluate the site conditions as well as the buildings which will be

constructed or rehabilitated on the site.

3.12 RURAL AREA DESIGNATION

Lenders must verify that projects are located in an area that meets the Agency’s definition 

of a rural area (see Paragraph 1.6). Lenders may verify eligibility at 

https://eligibility.sc.egov.usda.gov/eligibility.

3.13 GENERAL SITE REQUIREMENTS

Multifamily housing properties must be located in areas that are appropriate for 

residential housing and represent reasonable real estate investments. To meet this requirement,

the area where the site is located must be a residential area that provides adequate services and 

facilities and is free from undesirable conditions. The requirements for an appropriate location 

are detailed below.

3-14
HB-1-3565

A. Public Facilities and Services

 Sites must have necessary public facilities and services to support the needs of the 

tenants. The lender must ensure that necessary facilities and services exist and that they 

are close and convenient to the site, including: 

• Central water and sewer systems; 

• Schools and hospitals; and

• Shopping, medical, and pharmaceutical services.

 

The “close and convenient” standard may differ by area based on local 

transportation and population density. Factors to consider include available 

transportation, traffic patterns, road conditions, and terrain. 

B. Less Desirable Areas

The Agency’s requirements for 

site development prohibit development 

in “less desirable” areas unless more 

attractive alternatives are not available. 

Such areas create unpleasant living 

conditions for residents and depress the 

value of the investment. 

3.14 SITE STANDARDS

Planning for development must take into consideration topography, soils, climate, 

adjacent land use, environmental impacts, energy efficiency, local economy, aesthetic and 

cultural values, public and private services, 

housing and social conditions, and a degree of 

flexibility to accommodate changes in local 

needs.

Lenders must review site plans for 

compliance with Agency site standards.

A. Applicable Codes

All multifamily housing projects must observe all applicable Federal, 

State, and local codes, laws, local ordinances, and zoning requirements, and 

regulations on health and safety standards.

3-15 

(02-23-12) PN 455 

Revised (03-15-17) PN 495 

Examples of Less Desirable Areas

Examples of less desirable areas include:

• Sites adjacent to train tracks;

• Industrial areas;

• Sites with environmental concerns; 

• Grain elevators and grain storage bins;

• Mobile home courts;

• Older, declining neighborhoods;

• Gas stations; and

• Car lots.

Technical Assistance on Site Standards

Technical services such as architectural, 

engineering, land survey, or site planning 

services must be performed by professionals 

who are qualified and authorized to provide such 

services in the State where the project is 

developed.
HB-1-3565

B. Adequate Utilities and Infrastructure

Sites must have infrastructure and utilities that are adequate for the needs of the 

site and that meet all local requirements. Ideally, the utilities should be publicly owned 

and have adequate capacity for the proposed development. If the project will operate its 

own system, lenders must approve the justification for private ownership.

C. Grading and Drainage

Soil and geological conditions must be suitable for the type of construction 

proposed. In questionable and unserved areas, the lender must obtain an engineering 

report with supporting data to identify all pertinent subsurface conditions that could 

adversely affect the structure and show proposed solutions.

D. Size and Shape

The size and shape of a site must be adequate for the proposed units as well as 

walks, parking, any onsite septic system, and other site improvements.

E. Undesirable Physical Conditions

Sites must not have undesirable physical conditions that create hazards or 

unnecessary development costs, such as:

• Rocks or soil conditions that increase development costs;

• Noise from nearby roads, railroad tracks, airports, or factories that create 

unacceptable residential conditions; and

• Pollution from nearby sources that create hazardous health conditions.

3.15 SITE DENSITY

Acceptable density standards will vary by market area and local codes. Because of these 

differences, program rules do not provide specific density standards. Instead, project density 

should be evaluated based on:

• Compatibility and consistency with the market and neighborhood.

• Sufficient size to accommodate necessary site features.

• Impact on total development costs and project budget.

3.16 NON-CONTIGUOUS SITES

The Agency prefers to guarantee loans for single and contiguous site projects, since

projects on single sites or contiguous sites are generally easier to manage and monitor than noncontiguous sites. Non-contiguous sites may be eligible for guarantees if the lender certifies that 

the parcels of land are:

• Located in one market area (a neighborhood or similar area where the property 

competes for tenants);

3-16
HB-1-3565

• Managed under one management plan and one management agreement; and

• In sufficiently close proximity to permit convenient and efficient management of the

property.

3.17 SITE CONTROL

At the time of closing, the borrower must have control of the housing and related land. 

Control means either current ownership rights to a long-term lease or a valid option to purchase 

or lease the land. After closing, the borrower must have a fully marketable title (fee interest) or 

land lease.

A. Land Ownership

The only form of ownership acceptable to the Agency is fee-simple ownership. 

Under this form of ownership the borrower holds a fully marketable title, which is

evidenced by a deed. The deed vests full interest in the property to the borrower. If 

proof of site control is in the form of a land purchase contract, full ownership interest 

must be converted to a deed prior to closing the loan.

B. Land Lease

A land lease is acceptable if the lease meets the following requirements:

• The lessor owns the land fee-simple;

• Neither the title nor the leasehold are subject to prior liens other than taxes not due

and payable;

• The amount of the guaranteed loan does not exceed the market value of the property, 

including the value of the leasehold;

• The unexpired term of the lease exceeds the term of the mortgage by at least 25

percent; 

• Rent charged for the lease does not exceed the rate being paid for similar leases in the 

area; and

• It is recorded in the location necessary to give notice to the public of its existence.

The lease must be in writing and must contain the following provisions:

• The lessor must authorize the proposed improvements required by the guaranteed 

mortgage;

3-17

(02-23-12) PN 455

Revised (09-07-22) SPECIAL PN
HB-1-3565

• The lessor must authorize the lender and Agency the right to foreclose the guaranteed

mortgage or to transfer the lease if the borrower defaults;

• The lender or the Agency are permitted to bid at a foreclosure sale or to accept deed 

in lieu of foreclosure;

• The borrower is permitted to transfer the leasehold as part of an ownership transfer of 

the property, in the event of default or inability to continue with the lease; and

• The lessor gives the Agency and the lender notice of lease default and a 60-day 

period of time for the Agency or lender to cure the default.

The lender must submit a copy of the leasehold agreement to the Agency for 

approval prior to loan closing. Any subsequent changes in the leasehold agreement must 

be approved by the Agency.

3.18 ENVIRONMENTAL REQUIREMENTS

To protect the environment and to ensure the value of a guaranteed loan, the Agency 

must undertake an environmental review. The Agency will request assistance of the lender in 

conducting this review. Agency staff will initiate the governmental review process after the 

lender submits Form RD 1940-20, “Request for Environmental Information”, and supporting 

documentation. The environmental review entails the publication of a public notice regarding 

the project and written feedback from different State and local offices concerned with 

environmental issues. The environmental review is complete only after the publication period of 

the public notice has expired, and the State Environmental Coordinator signs the appropriate 

documents. The environmental review takes at least 45 days to complete. More time will be 

needed if State and local environmental authorities have any findings. Delays in the 

environmental review process are certain if the project location is on an archaeological burial 

site, in flood plains, or protected areas. Properties must meet the Agency environmental 

standards in Chapter 11 and in 7 CFR Part 1970, Executive Order 12898 and Departmental 

Regulation 5600-002.

A. Lender Responsibilities Prior to Requesting Guarantee

The Agency and the lender will incorporate into their lending practices an 

environmental risk management program. A major component of the environmental risk 

management program is the conduct of due diligence in the context of real estate 

transactions. The lender will ensure that due diligence is performed and the results taken 

into consideration through an appraisal as further detailed in Chapter 11.

3-18
HB-1-3565

B. Agency Environmental Review

The National Environmental Policy Act (NEPA) requires Federal agencies to take

into consideration the potential impacts of a proposed project on the human environment 

and on any protected environmental resources in the vicinity of the proposed site. 

Therefore, prior to loan approval, obligation of loan funds, issuance of a conditional 

commitment, or other commitment of Agency resources, whichever occurs first, a NEPA 

environmental review must be completed and conducted in accordance with 7 CFR part 

1970. The environmental review examines the environmental consequences of the 

proposed action and ensures that alternatives are developed and incorporated into the 

proposal to either avoid environmental impacts or to mitigate adverse effects to the 

environment. Further information is found in Chapter 11. The applicant is responsible

for conducting the NEPA review. For projects with 5 - 12 units, the Agency, at its 

discretion, may conduct the review for the applicant.

3.19 CIVIL RIGHTS

Residents of housing projects benefiting from Federal assistance have the right to live in 

their homes free from the burden of discrimination. Consequently, for every GRRHP project, 

the Agency staff will conduct a civil rights impact analysis to determine whether the proposed 

project would negatively or disproportionately affect tenants by virtue of their race, color, sex, 

national origin, religion, age, disability, or familial status.

The civil rights impact analysis will address two areas in particular:

• The extent to which the project serves all eligible members of the community. The 

Agency will examine applicant plans to market the project affirmatively and to 

implement non-discriminatory occupancy policies and procedures.

• The extent to which the project creates disproportionately high and adverse human 

health or environmental effects on minority and low income populations. The Agency

will examine the project proposal to ensure that there are no factors that create adverse 

environmental impacts. Examples of such factors include locating the project near a 

sewage treatment facility, train tracks, or a farm that routinely sprays or dusts crops.

Guidance on the civil rights impact analysis can be found in RD Instruction 2006-P. This form 

should be completed and filed with the Agency’s Environmental file folder.

3.20 PROJECT DEVELOPMENT

All construction, rehabilitation, and use of the property must comply with applicable 

governmental statutes, codes, rules, and regulations.

3-19

(02-23-12) PN 455

Revised (09-07-22) SPECIAL PN
HB-1-3565

A. Project Size

Rental housing properties with less than five dwelling units are ineligible for 

guarantee. There is no maximum number of dwelling units that renders a project 

ineligible. However, the market analysis, which is a part of the underwriting process, 

takes into account market demand and could limit project size.

B. Agency Construction Requirements

New construction, rehabilitation, modular, and manufactured structures 

must meet the standards contained in RD Instruction 1924-A and the site 

development standards found in RD Instruction 1924-C. Unless an exception is 

granted for special housing needs as referenced in Paragraph 3.23, refinancing of existing 

housing and indebtedness is not an authorized use of guaranteed loan funds.

The lender is responsible for inspection of the project to ensure compliance with 

contract documents and State and local building requirements.

Acquisition with rehabilitation is permitted, subject to the following conditions:

• The portion of the program authority guaranteed funds for acquisition with 

rehabilitation may be limited depending on program goals;

• Rehabilitation requires replacement or alteration of building spaces, mechanical 

systems, or project facilities; 

• Existing structures must be structurally sound and functionally adequate prior to the 

start of repair work; 

• Per unit rehab costs must be at least $6,500 or more; and

• When completed, the rehabilitated building(s) must be energy efficient and in “like 

new” condition.

Rehabilitation with a stay-in-owner is permitted, subject to the following 

conditions:

• Rehab costs must be at least $6,500 per unit and the rehab renders the project 

in like-new condition [and energy efficient] as corroborated by an Agency 

approved C.N.A. that shows no deferred maintenance and that no repairs will 

be needed for at least the next 5 years.

• The owner/borrower (or any of its principals) cannot receive any

payments/compensation/fees/cash-out (as consultants, developer, contractor (general

or sub), equity, etc.) from the guaranteed loan funds.

3-20
HB-1-3565

C. Federal Accessibility Requirements

All GRRHP loans are subject to the Americans with Disabilities Act 

and the Fair Housing Act. Projects receiving interest credit, if applicable or 

other Federal financial assistance are also subject to Section 504 of the 

Rehabilitation Act of 1973. These regulations must be addressed in the proposed 

construction plans and specifications.

• The Americans with Disabilities Act (ADA) (42 U.S.C. 12131; 47 U.S.C. 155, 201, 

218, and 225) addresses the civil rights of individuals with disabilities in the areas of 

employment, public accommodations, State and local government services, and 

telecommunications. The ADA states that discrimination includes the failure to design 

and construct facilities (built for first occupancy after January 26, 1993) that are 

accessible to and usable by persons with disabilities. The ADA also requires the 

removal of architectural and communication barriers that are structural in nature in 

existing facilities, if the removal is readily achievable, easily accomplishable, and able 

to be carried out without much difficulty or expense.

• The Fair Housing Act (42 U.S.C. 3601-19) requires that multifamily dwellings meet 

the design and construction requirements at 24 CFR 100.205 that implements the Fair 

Housing Act.

• Section 504 of the Rehabilitation Act of 1973 prohibits discrimination in Federallyassisted programs on the basis of disability. Section 504 imposes requirements to 

ensure that "qualified individuals with disabilities" have access to programs and 

activities that receive Federal funds. GRRHP lenders and borrowers are considered 

recipients and sub recipients under the Act if interest credit is awarded. The specific

requirements under Section 504 are summarized in Exhibit 3-2. Under Section 504, 

recipients are not required to take actions that create undue financial and 

administrative burdens or alter the fundamental nature of the program. Contractors 

and vendors are subject to Section 504 requirements only in the work they do on 

behalf of a recipient or sub recipient.

3-21

(02-23-12) PN 455

Revised (03-15-17) PN 495
HB-1-3565 

Exhibit 3-2

Section 504 Requirements

Removal of Physical Barriers

For new construction of multifamily projects, five percent of the units in the project (but not less than one unit) 

must be accessible to individuals with mobility impairments, and an additional two percent of the units (but not less 

than one unit) must be accessible to individuals with sensory impairments.

• The Section 504 definition of substantial rehabilitation multifamily projects includes construction in a project 

with 15 or more units for which the rehabilitation costs will be 75 percent or more of the replacement cost. In 

such developments, five percent of the units in the project (but not less than one unit) must be accessible to 

individuals with mobility impairments, and an additional two percent (but not less than one unit) must be 

accessible to individuals with sensory impairments.

• When rehabilitation less extensive than substantial rehabilitation is undertaken, alterations must, to the 

maximum extent feasible, make the unit accessible to and usable by individuals with disabilities until five percent 

of the units are accessible to people with mobility impairments. Alterations to common spaces must, to the 

maximum extent feasible, make the project accessible.

• Accessible units must be, to the maximum extent feasible, distributed throughout projects and sites and must be 

available in a sufficient range of sizes and amenities so as not to limit choice.

• Owners and managers of projects with accessible units must adopt suitable means to ensure that information 

regarding the availability of accessible units reaches eligible individuals with disabilities. They also must take 

reasonable non-discriminatory steps to maximize use of such units by eligible individuals. 

• When an accessible unit becomes vacant, before offering the unit to a non-disabled individual, the 

owner/manager should offer the unit, first to a current occupant of the project requiring the accessibility feature 

and second to an eligible qualified applicant on the waiting list requiring the accessibility features.

• The usual standards for ensuring compliance with Section 504 are the Uniform Federal Accessibility Standards 

(UFAS), although deviations are permitted in specific circumstances.

Provide Program Accessibility

• Individuals with disabilities must be able to learn of, apply for, and participate in Federally-assisted programs or 

activities.

• Special communication systems may be needed for outreach and ongoing communication (e.g.,

Telecommunications Devices for the Deaf (TDD), materials on tape or in Braille, or disabled-accessible locations 

for activities and meetings). 

• Policies and procedures must be non-discriminatory (e.g., housing providers may not ask people with disabilities

questions not asked of all applicants, screen individuals with disabilities differently, or assess an individual's 

ability to live independently).

Make Employment Accessible

• Employers must not discriminate.

• Employers must remove physical and administrative barriers to employment.

• Employers must make reasonable accommodations for individuals with known disabilities (e.g., job 

restructuring, providing readers or sign interpreters, or making facilities accessible).

Administrative Requirements

If recipients or sub recipients have 15 or more employees, they must:

• Designate a Section 504 Coordinator; and

• Notify program participants and employees of non-discrimination policies. 

All recipients and sub recipients must conduct self-evaluations of compliance with Section 504.

3-22 
HB-1-3565

SECTION 5: FINANCING TERMS

3.21 OVERVIEW

The lender must ensure that the loan submitted for Agency guarantee meets specific loan 

requirements established in the regulation and the Notice. The lender must follow statutory, 

regulatory and Agency policy on eligible use of proceeds, maximum loan amounts, maximum 

loan-to-value ratio, and loan terms and interest rates. In addition, lenders must observe Agency 

guidance on parity loans and participation loans with other lenders. These requirements apply to 

all GRRHP guarantees. 

3.22 OCCUPANCY AND RENT RESTRICTIONS

The guaranteed loan program contains three distinct features with respect to affordability 

of units. Lenders must ensure that loans are underwritten and that mortgage documents 

adequately address these restrictions. GRRHP income limits can be found on the Rural 

Development website at Multifamily Housing Loan Guarantees. 

• Tenant Income Restrictions. At initial occupancy, tenancy is restricted to 

individuals and families whose incomes do not exceed 115 percent of AMI (adjusted 

for family size). The tenant income restriction must be supported by a deed restriction 

for each GRRHP loan guarantee. 

• Rent Restrictions. At rent up and on a continuing basis thereafter, rents on 

any GRRHP unit, including tenant paid utility allowances, may not exceed 30 

percent of 115 percent of AMI (adjusted for family size). In addition, the 

average rent for the entire project, including any tenant paid utilities, may not exceed 

30 percent of 100 percent of AMI (adjusted for family size). For this purpose, the 

Income Limits can be found on the Rural Development website at Multifamily 

Housing Loan Guarantees. 

• Deed Restrictions. The property must remain as affordable rental housing for the 

original loan term. To ensure compliance with this requirement even if the loan is 

prepaid, restrictive language must be recorded in the deed or any other instrument that 

conveys with the property if the mortgage is prepaid. Sample language is provided in 

Exhibit 3-3.

3-23 

(02-23-12) PN 455 

Revised (04-24-23) PN 581
HB-1-3565

Exhibit 3-3

Sample Restrictive Language for Deeds

Example I: If the guaranteed loan is being used to finance the purchase of the property 

and the construction of the affordable rental housing, the following restriction would be 

placed on the deed:

"The owner(s), for themselves and their successors in interest, agree that until (insert 

date), the property can only be utilized as rental housing (not homeownership) and can

only be leased to low or moderate income families or persons, whose incomes at the time 

of initial occupancy do not exceed 115 percent of the median income of the area (Eligible 

Tenants), as determined by the United States Department of Agriculture in accordance 

with 42 U.S.C. 1490p-2. No Eligible Tenant occupying the housing will be required to 

vacate nor any Eligible Tenant denied occupancy in violation of this provision. This 

restriction is enforceable by Eligible Tenants or the United States Department of 

Agriculture. For further questions, contact the United States Department of Agriculture, 

Rural Housing Service, Director of Multi-Family Housing Production and Preservation

Division, 1400 Independence Avenue, SW, Room 5017-S, Washington, DC 20250."

Example II: If the applicant already owns the property, the lender will need to create and 

file a deed declaration in the suggested format:

"The owner(s), for themselves and their successors in interest, agree that until (insert

date), the property can only be utilized as rental housing (not homeownership). The 

following property

[Legal description of property]

can only be leased to low or moderate income families or persons, whose incomes at the 

time of initial occupancy do not exceed 115 percent of the median income of the area 

(Eligible Tenants), as determined by the United States Department of Agriculture in 

accordance with 42 U.S.C. 1490p-2. No Eligible Tenant occupying the housing will be 

required to vacate nor any Eligible Tenant denied occupancy in violation of this 

provision. This restriction is enforceable by Eligible Tenants or the United States 

Department of Agriculture. For further questions, contact the United States Department 

of Agriculture, Rural Housing Service, Director of Multi-Family Housing Guaranteed 

Loan Division, 1400 Independence Avenue, SW, STOP 0781, Washington, DC 20250."

3-24
HB-1-3565

3.23 USE OF LOAN PROCEEDS

As a first step in determining the financing terms, lenders must determine that all 

of the proceeds of the guaranteed loan will be used for eligible purposes as set 

forth in [7 CFR 3565.205]. The use of Agency guaranteed loan proceeds must 

comply with the standards and conditions for housing and facilities in RD Instruction 

1924-A and the standards for site development in RD Instruction 1924-C. To be

competitive in the market, the housing developed in this program may require additional 

features such as dishwashers, garbage disposals, granite countertops, hardwood flooring 

or wall-to-wall carpeting. The Agency may approve a higher level of amenities,

construction, or fees if the lender certifies that such costs and features are reasonable and 

customary for similar housing in the market area.

A. Eligible Uses of Loan Proceeds

The proceeds of a guaranteed loan may be used for the following purposes:

• New construction;

• Rehabilitation of buildings and acquisition costs when related to the rehabilitation;

• Acquisition of existing buildings, when approved by the Agency, for projects that 

serve a special housing need;

• Acquisition and improvement of land on which housing will be located;

• Development of on-site and off-site improvements essential to the use of the property;

• Development of related facilities such as community space, recreation, storage, or

maintenance structures, except that any high cost recreational facility, such as 

swimming pools and exercise clubs or similar facilities, must be specifically approved 

by the Agency;

• Construction of on-site management or maintenance offices and living quarters for 

operating personnel for the property being financed;

• Purchase and installation of appliances and certain approved decorating items, such as 

window blinds;

• Development of the surrounding grounds, including parking, landscaping, and 

fencing;

• Costs associated with commercial space provided that:

◊ The project is designed primarily for residential use;

◊ The commercial use consists of facilities such as laundry rooms, that are 

considered essential and not conveniently available; and 

3-25

(02-23-12) PN 455

Revised (03-15-17) PN 495
HB-1-3565

◊ The commercial space does not exceed 10 percent of the gross floor area of the 

residential units and common areas, and the commercial income does not exceed 

10 percent of total project income, unless a higher level is specifically approved 

by the Agency.

• Costs for feasibility determination, loan application fees, appraisals, environmental 

studies, professional fees or other fees determined by the Agency to be necessary to

the development of the project;

• Technical assistance to and by non-profit entities to assist in the formation, 

development, and packaging of a project or formation or incorporation of a non-profit 

borrower entity;

• Education programs for a board of directors, both before and after incorporation of a 

borrower entity that will serve as the borrower;

• Construction interest;

• Relocation assistance, in the case of rehabilitation projects;

• Developers’ fees; or

• Repaying applicant debts when:

◊ The Agency authorizes the use of loan funds to pay debts for work, materials, 

land purchase, or other fees and charges before the loan closed; or

◊ The Agency concurs with a determination by the lender that costs of work, fees,

and charges incurred prior to loan application are integral to development of the 

guarantee application and project.

B. Ineligible Uses of Loan Proceeds

Loan proceeds must not be used for the following:

• Specialized equipment for training or therapy;

• Student housing;

• Housing in military impact areas - military impact area is defined in Exhibit 3-4 of 

this chapter;

• Cooperative Housing;

• Housing that serves primarily temporary and transient residents, such as students;

• Special care facilities and institutional type homes that require licensing as a medical 

care facility;

3-26
HB-1-3565

• Operating capital for central dining facilities or for any items not affixed to the real 

estate, such as special portable equipment, furnishings, kitchenware, dinnerware, 

eating utensils, movable tables and chairs, etc.;

• Payment of fees, salaries, and commissions or compensation to borrowers, with the 

exception of developers’ fees; or

• Refinancing of an outstanding debt, except in the case of an existing GRRHP 

guaranteed loan where the Agency determines that the refinancing is in the best 

interest of the government or the program. The term and amount of any refinanced 

loan must not exceed the maximum loan amount or term limits.

3.24 APPLYING SECTION 207(c) LOAN LIMITS

The loan amount must not exceed the applicable maximum per dwelling unit

limitations amended by H.R. 1629, dated April 26, 2001, of Section 207(c)(3) of the 

National Housing Act. The limits are published by HUD, but the lender should contact the local 

HUD Multifamily Hub or Program Center Office as adjustments to the limits are made for

3-27

(02-23-12) PN 455

Revised (09-07-22) SPECIAL PN

Exhibit 3-4

A military impacted area is generally a housing market in which:

1. Military-connected households comprise 25 percent or more

 of the total households (NOTE: Military-connected

 households are those households comprised of military

 personnel and civilian employees of the installation and

 their dependents); and or

2. The closure of the installation or reduction in military-

 connected households will destabilize the housing market,

 resulting in a rental vacancy rate above 10 percent for

 a period of 2 or more years; or

3. There is concern about the continued stability of the

 local housing market based on DOD's plans to change the

 installation's mission and reduce military strength and

 civilian employment.

 A military impacted area generally would be a small

 metropolitan area or a nonmetropolitan housing market.

 It is unlikely that installations in large metropolitan

 housing markets will meet the above criteria.
HB-1-3565 

different locales. The Secretary of HUD may increase these limits up to an amount not to exceed 

110 percent in any geographical area where the Secretary finds that cost levels so require, and up 

to 140 percent on a project-by-project basis where the Secretary determines it is necessary. The 

amount also may be increased by up to 20 percent, if necessary, to account for the cost of 

installation of certain energy improvements. Prior to closing, lenders must also certify that the 

limits under 207(c) (3) have not been exceeded. Lenders should refer to HUD Notice H2001-10. 

The Notice, available at 

http://portal.hud.gov/portal/page/portal/HUD/program_offices/administration/hudclips/notices/hsg, 

contains the methodology used to determine costs not attributable under Section 207 (c)(3).

3.25 MORTGAGE TERMS

A. Maximum Loan Term

Where the transaction includes a construction loan guarantee under Option Two 

or a continuous guarantee under Option Three, the lender is expected to determine the 

construction loan term, which cannot exceed 24 months. 

The Agency must review the construction period and determine that it is 

appropriate. 

The lender is expected to determine the loan's repayment term. However, the 

repayment term cannot exceed 40 years (including the construction period) or the 

remaining economic life of the project, whichever is less. Where interest rates available 

on shorter term loans result in lower unit rents, lenders are encouraged to make shorter, 

fully amortizing loans. The Agency will not permit negative amortization during the 

term of the loan. 

Loans guaranteed by the GRRHP must have a term of not less than 25 and not 

more than 40 years from the date of the loan. The loan amortization period cannot be less

than 25 years or more than 40 years. The final payment of the balance is due at the end of 

the loan term. The Agency may accept requests from lenders to restructure the loan 

terms of prior awards accordingly 

B. Maximum Interest Rate 

The interest rate on the loan will be the negotiated rate between the lender and the 

borrower. If a maximum rate is established by the Secretary, the negotiated rate 

aforementioned cannot exceed the maximum allowable rate. The loan must bear a fixed 

rate of interest over the entire term. 

C. Interest Rate Reduction (Interest Credit), if Applicable 

When authorized by Congress, the Agency may provide additional financial assistance by 

providing an interest credit to reduce the interest rate. The interest rate was previously

reduced to the Long Term Monthly Applicable Federal Rate (AFR). However, the use of 

the AFR was eliminated by the enactment of the Housing and Economic Recovery Act of 

2008. 

3-28 
HB-1-3565

The lender and borrower have two options for calculating the rate to the borrower:

• Option 1 – Apply the interest credit amount to a new loan note guarantee’s interest 

rate negotiated between the borrower and the lender. The lender may change the 

previously calculated effective interest rate to the borrower. The new effective rate 

may be higher than the previously negotiated rate.

• Option 2 – Continue to process these deals with the existing loan note guarantee’s 

interest rate under the program guidance in effect at the time the conditional 

commitment was issued, thereby not changing the effective interest rate to the 

borrower.

The interest credit is payable annually in arrears after the first day of January 

following the project’s first amortization payment. 

Interest credit awards are competitive. They are based on criteria and a scoring 

threshold. No more than the amount established by the Agency will receive interest 

credit. Lenders must separately amortize the loan amount that receives interest credit 

from the loan amount that is not eligible for the interest credit award. The interest credit 

will be payable the following January 1 of the year in which the project has reached 

occupancy standards, and/or the construction guarantee has converted to a permanent 

guarantee.

D. Maximum Loan Amount

The lender is responsible for determining the appropriate maximum loan amount 

based on, among other things, market demand, absorption period, loan-to-value limits, 

other sources of financing, and total project development costs. Development costs 

include housing and related facilities. Lenders must determine the total development cost 

of the property by reviewing proposed plans and specifications and the construction bids 

presented by the borrower and the builder.

1. Determining Maximum Loan-to-Value

For borrower entities that are not State, local, or tribal government bodies, or nonprofit organizations, the guaranteed loan cannot exceed 90 percent of the total

development cost or property value (as determined by the lender), whichever is less. 

Non-profit entities, public agencies, and Indian tribes may borrow up to 97 percent of the 

lesser of total development cost or appraised value. In order to mitigate the

Government’s exposure on high loan-to-value (LTV) loan guarantees, 75% and higher

LTV loans guarantees may be required to pay down a portion (i.e., 10%) of the 

guaranteed loan’s principal before any distributions of excess cash flow to 

borrower/owners are allowed.

3-29

(02-23-12) PN 455

Revised (11-15-19) PN 531
HB-1-3565

Issues such as market conditions and borrower and property weaknesses should 

affect the loan-to-value limit. For example, if the area in which the property is to be 

located is experiencing an economic downturn that is not yet reflected in comparable 

sales, the lender should consider a lower loan-to-value to hedge against the expected drop 

in property values.

2. Other Financing Sources

Projects may need additional financing to be feasible in a given market. Many 

GRRHP projects will include equity financing from Low Income Housing Tax Credits 

(LIHTC) or will involve grants or loans from Home Investment Partnership (HOME)

funds or State or local housing assistance. In addition, some projects may involve

secondary bank financing to cover costs not eligible or feasible under the guaranteed loan 

program. This additional capital should result in a lower loan-to-value ratio on the 

GRRHP loan. 

SECTION 6: DETERMINING PROPERTY VALUE

3.26 OVERVIEW

The lender is ultimately responsible for determining the value of a property. In doing so, 

the lender must take into account the appraisal and all of the factors related to the borrower, 

property, and financing. There is not a formula that can be applied in every case, but rather a 

weighing of multiple factors and the unique circumstances of each property. Low Income 

Housing Tax Credit equity, interest credit and tax abatements may not be used to determine

value of a property. The experience and knowledge of the lender’s underwriter is critical to 

making an appropriate determination. The underwriter determination must be clearly supported 

and accepted by the lender’s loan committee.

The following is a discussion of the information that must be examined by the lender in 

determining property value.

3.27 CASH FLOW ANALYSIS

The lender must analyze the proposed cash flow for the property to be sure that it is 

reasonable and supported by information on income and expenses for similar properties. Any 

unique factors in the analysis must be explained. The lender must also review the borrower’s 

estimate of future income and expenses for the property. This review should include a cash flow

analysis over a 15-year period.

A. Operating and Maintenance Expenses

The operating budget is used to project the income and expenses for the project

and the net operating income (NOI) the project will have available for debt service. The 

operating budget must reflect the following:

3-30
HB-1-3565

• Income Analysis. The borrower must provide a schedule of proposed rents 

(exclusive of utility allowances) and any other project income. Supporting 

documentation must include rents, tenant paid utilities, and vacancy levels at 

comparable properties. Exhibit 3-5 outlines how the income side of a project budget is 

constructed.

• Operating Cost Projections. These are estimated operating expenses, including 

costs of maintenance, repairs, utilities, and taxes. These estimates must be based upon 

the specific requirements of the subject property. Borrowers should support estimates 

with written documentation, when possible. Exhibit 3-6 outlines how the expense side 

of the projected budget is constructed.

B. Debt Service

In determining value, lenders must consider whether the property will generate 

sufficient NOI to pay debt service and provide a return to the owner. A rule of thumb for 

rental properties is that properties must have sufficient net income to provide a 

reasonable cash surplus after expenses, or “debt service coverage.” Debt service

coverage (DSC) is the ratio of annual NOI to the annual mortgage principal and interest 

payment. The Agency requires lenders to use DSC of at least 1.15, unless the lender 

justifies a lower ratio and receives Agency approval. The NOI and DSC calculations are 

shown in Exhibit 3-7. 

3-31 

(02-23-12) PN 455 

Revised (03-15-17) PN 495 

Exhibit 3-5 

The Income Projection

The income projection estimates rental and other income (revenue) and occupancy 

rates. 

The project’s Effective Gross Revenue is a function of:

 Gross Rent Potential (rents that would be collected if all units are rented and all

tenants paid their rent).

 Less rent not collected due to vacancies, delays in lease-up, and bad debt.

 Plus other income from parking, laundry, commercial space, etc.

Sources of information for the development of this part of the proforma include:

 The Rent Roll (for existing properties and comparable properties) is the source

document for information on units occupied and vacant, rents charged and 

collected, bad debt, move-in and move-out dates, and so on.

 A Market Analysis (for newly constructed and substantially rehabilitated 

properties).
HB-1-3565 

Exhibit 3-6 

The Expense Projection

The expense projection estimates the cost of operating the property. The project's total expenses are a 

function of:

• Rental expenses (marketing, promotions, rent concessions);

• Management costs or fees; 

• Financing costs such as bond financing expenses;

• Annual renewal and one-time guarantee fees (if applicable); 

• Inspection fees; 

• Utility and maintenance costs; and 

• Taxes and insurance.

Sources of information for this part of the pro-forma include:

• Local and State tax offices;

• Property management companies;

• Utility companies; and

• Historical records on subject or comparable properties.

The proforma also includes the Reserve for Replacement Account. Projects must set aside a reserve 

to cover the costs of non-routine repairs and replacements, such as roofs, appliances, and other capital 

improvements. The amount of the reserve depends upon local fixture costs, age, and conditions.

3-32 

Exhibit 3-7 

NOI and DSC Calculations

NOI and DSC are important terms used in underwriting a loan. NOI is total project 

income minus expenses.

Total income - Total expenses = NOI

DSC is the ratio of NOI to the annual principal and interest (P&I) payments on the 

mortgage.

DSC = Annual NOI ÷ Annual P&I Mortgage Payment

The DSC must always be greater than 1, since cash flow needs to be more than the 

mortgage payment in order for the project to be feasible. For GRRHP loans, the minimum

acceptable ratio is 1.15, or 115 percent. Lenders may set a higher requirement.

Example: A project is estimated to have an annual NOI of $103,500 and annual 

mortgage payments of $90,000. The DSC is $103,500 ÷ $90,000, or 1.15.
HB-1-3565

3.28 APPRAISAL

The appraisal provides a complete, accurate description of the property and the market 

and an estimate of the property’s market value. The appraiser’s conclusions must be based upon

and supported by market data, logical analysis, and sound professional judgment. 

A. Appraisal Requirements

All real property appraisals associated with Agency guaranteed loan 

making and servicing transactions must meet the requirements contained in the

Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 

1989 and the appropriate guidelines contained in Standards 1 and 2 of the Uniform 

Standards of Professional Appraisal Practices (USPAP). All appraisals must include 

consideration of the effect of a potential contamination from hazardous wastes and from 

the release of nearby hazardous substances and petroleum products on the security value 

of real property. This information will be made available to the appraiser through the due 

diligence report. Chapter 11 contains further details.

Appraisals used for Agency decision-making must be current. A current 

appraisal is an appraisal with a report date that is not more than one year old. A current 

appraisal is required before the loan guarantee is issued. 

B. Appraiser Qualifications

The lender is responsible for selecting qualified appraisers. To be considered 

qualified, appraisers must:

• Be qualified to appraise rental housing;

• Be familiar with the market in which the properties are located; and 

• Be licensed and certified in the State in which the property is located.

C. Appraisal Methods

The appraiser must provide a complete summary report, which considers the three 

generally accepted appraisal methods, and follow the standards identified in USPAP. 

Accepted appraisal methods include the Market or Comparable Approach, the Cost

Replacement Approach and the Income Approach. The following is a brief description of 

each approach.

• The Market or Comparable Approach compares the property to sale prices of 

comparable properties in the area. Adjustments are made for differences in amenities,

size, and other factors between the comparables and the subject property.

• The Cost Replacement Approach determines the cost of building the project on the 

basis of current prices and using current standards of material and design.

3-33

(02-23-12) PN 455

Revised (04-24-23) PN 581
HB-1-3565

• The Income Approach determines the current value of the property based on the

present value of a stream of future income. 

For program purposes, the appraiser must rely most heavily on the Income 

Approach to assess the value of the property because the property being considered for 

the guarantee is an income-producing property. The other appraisal methods, such as the 

Market or Comparable Approach and the Cost Replacement Approach, cannot substitute 

the Income Approach for determining the value of the property. 

D. Appraisal Report Guidelines

The appraisal report must include a market analysis and a narrative attachment 

that supports the appraiser’s conclusions. Any facts or issues about the property or the 

market that the appraiser thinks are important to the value determination must be 

addressed in the appraisal report. The lender must thoroughly review the appraisal report

and note any circumstances or factors that, in the lender’s view, would modify the 

appraiser’s conclusions.

E. Market Study

A separate market study will be conducted and it must include the material listed 

in Exhibit 3-8.

3-34
HB-1-3565

3-35 

(02-23-12) PN 455 

Revised (03-15-17) PN 495 

Exhibit 3-8 

Required Contents of a Market Study

The market study must include:

1. A complete description of the proposed site, including location of the land, location of 

services, and their distances from the site.

2. Major employment data including: the name, location, and date of establishment of any major 

employers within the community; the product or service of each employer; the number of 

employees and salary range for each employer; and business permits issued per year for the

last three years.

3. Population by year, number, and total, plus the annual increase/decrease and percentage.

4. Population characteristics by age.

5. Household data by number, year, and number of persons per household.

6. Breakdown of households by owners and renters.

7. Households by income group.

8. Building permits issued per year for single and multiple unit dwellings.

9. Housing stock as defined by total number of units: one unit buildings, two or more unit 

buildings, mobile homes, and the number of these lacking some, or all, plumbing facilities

(substandard housing).

10. A survey of existing rental housing including: name, number of units, bedroom mix, family 

or elderly type, year built, rent, vacancies, location, and amenities.

11. Number of rent-overburdened households. 

12. A projection of housing demand based on:

(a) Household growth.

 (b) Units constructed since the last census.

 (c) Number of owned and rented units.

 (d) Number of replacements.

 (e) Number of persons in the eligible income range.

13. For proposals where the applicant is requesting low income housing tax credits (LIHTC), the 

applicant must provide the number of LIHTC units and the maximum LIHTC incomes and 

rents by unit size. This information will determine the levels of incomes in the market area 

which will support the basic rents while also qualifying the borrower for tax credits.