The U. S. Department of Housing and Urban Development (HUD) offers several programs that provide HUD multifamily financing. These are important programs that help eligible investors obtain the funding they need to develop or purchase multifamily properties.
The Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) were founded as two separate entities. In 1965, the FHA became part of HUD, after they began to share far more responsibilities than either had originally planned. HUD oversees and guarantees both residential and multifamily lending and insurance programs.
Types of HUD Loans
A common misconception is that HUD makes loans to developers and real estate investors for the recapitalization, acquisition, rehabilitation, and construction of multifamily properties. In reality, HUD only underwrites and insures these loans, which are provided by other lenders.
- HUD Loans for Refinancing, Rehabilitating or Acquiring Apartment Properties
The HUD 223(f) program is HUD’s flagship product for the refinancing or acquisition of multifamily properties. It was created for the refinance or acquisition of multifamily properties. Many believe that HUD only focuses on Section 8 properties, subsidized housing, or low-income housing. In reality, the HUD 223(f) program insures loans for the full spectrum of market-rate multifamily properties across the nation, with further considerations for low-income housing, rental assistance, LIHTC, and other affordability components.
The HUD insurance programs were created to ensure the ongoing availability of capital for the acquisition, rehabilitation, development, and refinancing of all apartment properties. This includes market-rate apartments, as well as affordable properties and subsidized housing.
- HUD Loans for Multifamily Developers and Apartment Construction
The FHA or HUD 221(d)(4) program insures multifamily developers building market-rate, low-income, rental assistance, and other multifamily developments. Loans generally range from $2 million to $100 million or more. In general, there is no hard cap or minimum for loan amounts. However, because of the costs involved with originating HUD-insured multifamily development loans, smaller developers may be hesitant to select these. Thankfully, the FHA has embraced change and new operational efficiencies over the years. Despite that, HUD 221(d)(4) loans can still take between eight months to a year to close, and they often require an experienced financial intermediary to assist during the entire process.
- HUD Loan Amortizations and Maturities
HUD-insured financing offers the longest terms in the industry. But something else also sets these loans apart: All HUD loans are fully amortizing, creating the longest amortizations in the industry and the most flexibility on debt service coverage ratios. Why? Longer amortizations mean lower payments.
HUD-insured construction loans offer 40 years of fixed-rate financing plus up to three additional years of financing during the construction period. HUD 221(d) provides one of the very few, if not the only, fixed-rate construction loans in the multifamily development business. Existing assets for purchase or refinance are similarly qualified to achieve very long-term, fully amortizing loans. For example, HUD 223(f) insured loans are fully amortizing for up to 35 years, provided the term and amortization do not exceed 75% of the property’s remaining economic life.
As industry professionals know, the longer the fixed rate, the higher the interest rate (except for in the case of an inverse yield curve). However, since they are government insured, HUD multifamily loans earn a AAA credit rating. This leads to rates that are lower than Fannie Mae and Freddie Mac’s 10-year fixed-rate loans.
HUD Timing and Red Tape
For all the benefits of HUD-insured loans (rates, leverage, term, amortization, etc.) there are undoubtedly additional hurdles to overcome. However, in the case of 221(d) and 223(f), the process is not as lengthy and difficult as it may have been in the past, provided you are represented by an experienced intermediary.
Affordable Properties
HUD multifamily loans include specific benefits for affordable properties. These include increased LTV allowances, reduced DSCR requirements, and lower mortgage insurance premiums, or MIPs.
HUD multifamily loans such as the HUD 221(d)(4) and HUD 223(f) are also a great fit when combined with the Low-Income Housing Tax Credit (LIHTC) program, which offers investors a dollar-for-dollar federal tax credit in order to encourage investment in affordable properties. These loans also fit well with the Rental Assistance Demonstration (RAD) program, which allows properties using certain HUD legacy housing assistance programs to convert their properties to long-term Section 8 HAP (Housing Assistance Payment) contracts.
Benefits of Acquiring Apartments using HUD Financing
- These loans feature low equity requirements and a high LTV allowance. Borrowers are allowed some of the highest LTV (loan-to-value) ratios available:
- 85% – market-rate properties (the maximum for these types of properties)
- 87% – affordable housing
- 90% – project-based rental assistance properties (i.e. Section 8, Section 202)
- Debt service coverage ratio (DSCR) set at generous minimums of:
- 1.18x – market-rate properties
- 1.15x – affordable housing
- 1.11x – rental assistance or subsidized housing properties
- Mortgage terms up to 35 or 40 years. In addition, construction projects get a three-year interest-only term for a total of 43 years.
- Low, fixed interest rates without balloon payments. These low rates allow supplemental financing and eliminate the risk of refinancing at a higher interest rate.
- There are no financial capacity, geographic, or population requirements. These loans are available for multifamily properties in all 50 states in the U.S. and several U.S. territories.
- Loans are non-recourse and fully assumable and they shield investors and developers from undue financial risk.
- Longer amortization periods (35 years versus 30 years) offer lower monthly payments than other loans, freeing up more capital for property owners.
- Funds are available for repairs and improvements.
CONCLUSION
HUD-insured loans may not be for everyone. They certainly are not advantageous for borrowers seeking small-balance loans, as fixed origination costs translate to higher costs. If your need for financing is time sensitive, an FHA-insured multifamily loan may also not be the best fit. In general, HUD-insured multifamily loans also do not fit the needs of merchant builders.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
