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HUD AND FHA

HUD (the US Department of Housing and Urban Development) and FHA (the Federal Housing Administration) were founded as two separate entities. However, they now share much more than originally planned. HUD oversees and guarantees both residential and multifamily lending and insurance programs.

The FHA, which in 1965 became a part of HUD deals primarily in residential lending, aids in the purchase of primary residences for Americans. Although the FHA is now a subsidiary of HUD, it is responsible for the overall management and administration of HUD's Multifamily Housing Programs. HUD, however, ultimately provides the insurance. 

HUD-INSURED 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. The reality is that HUD actually insures these loans, which are made by investors. 

REFINANCING, BUILDING, REHABILITATING, OR ACQUIRING MULTIFAMILY PROPERTIES

The FHA or HUD 223(f) program was created for the refinance or acquisition of multifamily properties. A common misconception is that HUD 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 so on.

The HUD and FHA insurance programs were created to ensure the ongoing availability of capital for the acquisition, rehabilitation, development and refinancing of all apartment properties. This absolutely includes market rate apartments. 

HUD FOR MULTIFAMILY DEVELOPERS

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 $2,000,000 to $100,000,000 or more. In general, there is no hard cap or bottom for the loan amounts. But, because of the costs involved with originating a HUD-insured multifamily development loan, developers of smaller multifamily projects are often intimidated by the pricing, as well as the process. Thankfully, the HUD 221(d)(4) process has been improved and streamlined over the years. However, these loans can still take 8-12 months to close. 

AMORTIZATIONS AND MATURITIES

FHA insured financing provides for the longest terms in the industry. But something else further sets these loans apart: all FHA 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.

FHA-insured construction loans are fixed for 40 years plus up to an additional 3 years during the construction period. HUD 221(d)(4) provides one of the very few, if not 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 does 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, in the case of FHA and HUD loans, these government-insured loans earn a AAA credit rating. This leads to rates that are lower than Fannie Mae and Freddie Mac 10-year fixed-rate loans

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)(4) 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).

HUD-insured loans require annual financial audits which may cost upwards of $2,500 per year. In addition, they take longer to close (223f loans may take 120 days, and 221d4 loans may take 10 months). Plus, there are more upfront costs and closing costs associated with the origination of HUD-insured loans. That said, a 223f insured loan isn't vastly different from originating a Fannie or Freddie multifamily loan. Other requirements involve things like: 

  • Phase 1 environmental reports are required to include led based paint and asbestos reviews for properties build before 1978

  • HUD doesn't insure loans for new properties located within a 100 year flood plain and construction

  • Substantial rehabilitation loans require adherence to David Bacon labor standards. The Davis Bacon Wage determination can be found online at www.wdol.gov/dba.aspx. By entering the state, county and construction type (in this case residential) the tool will populate the most recent wage requirements. 

Additional requirements are spelled out in the "Loan Programs" section of our website relative to each product. 

Conclusion

HUD-insured loans may not be for everyone. They certainly are not for small balance loans (as fixed origination costs translate to higher costs when interpreted as a percentage of the loan amount). Time sensitive loans are also not likely to be the best fit for an FHA insured loan. 

Navigate our website and www.multifamily.loans to understand all the multifamily financing options available in order to make the best choice. Overall, having the guidance of an experienced intermediary financing the acquisition, development, rehabilitation or recapitalization of apartment properties should result in a reasonably seamless process. 


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