8.7.1 Public Sources

A. For all Sections of the Act (SOA), when secondary financing is funded by sources such as HOME funds, Affordable Housing Program, Federal Home Loan Banks (FHLB), Grants, or other quasi-public, federal, state, or local governmental sources, the following is applicable:

1. The subordinate loan must be documented by a promissory note (with terms similar to form HUD92223M, Surplus Cash Note) and may be secured with a mortgage lien as prescribed by the governmental funding source and reviewed and approved by HUD and made subordinate to the HUDinsured first mortgage using form HUD-92420-M, entitled “Subordination Agreement - Public.” At a minimum, the associated note will need to contain the following language from Section 8.7.5 below. Note that the parties will need to execute and record a Subordination Agreement and the note will need to conform to the terms in Section 3 of the Subordination Agreement.

2. Secondary financing (or grants lent to the property as a secondary loan) may be used to offset up to 100% of the applicable SOA equity requirements, and may also be used to finance non-mortgageable costs, which when added to the HUD mortgage and required equity contribution, may exceed 100% of the project’s total cost. None of these sources may be substituted for Tax Credit Equity and all remain subject to the cumulative 75% limit on payments from surplus cash.

3. Non-mortgageable costs (i.e. replacement cost items, not eligible for inclusion in the HUD insured loan) to be financed by the secondary loan, must be certified by the funding source to be reasonable and necessary to complete the project. Documentation to this effect must be included with the application submission.

4. The term of a subordinate loan should generally be coterminous with the HUD insured first mortgage. However, the HUD Underwriter may consider exceptions on a case-by-case basis for public debt when other HUD programs (e.g., the HOME program, National Housing Trust Fund) require shorter amortizations and the risk is mitigated. Examples of mitigants include items such as significant additional public funds, low loan-to-value or loan-to-cost ratios, below market rents or higher than minimum debt service coverage.

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Chapter 8 Mortgage Credit 8.7 Secondary Financing

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5. Any restrictive covenants in the secondary financing must expire upon foreclosure of the HUD insured loan’s mortgage or deed to trust. However, when the source of the secondary financing is HOME program funds, HUD will permit the Rider/Restrictive Covenant Agreement to be modified such that the restrictive covenants will survive foreclosure of the FHA insured security instrument. Additionally, state lending programs that provide secondary financing on terms similar to those under the HOME Program may also be considered under this policy on a case by case basis.