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Who Finances Workforce Housing?
While this critical property sector is eligible for some HUD financing, many other solid loan options exist.
Much of the Department of Housing and Urban Development’s focus has been on traditionally “affordable” housing, such as Section 8’s Housing Choice Voucher Program or those communities benefiting from Low-Income Housing Tax Credits. However, workforce housing has become a key component of housing affordability in the United States.
What Is Workforce Housing?
The generally accepted definition of workforce housing is housing that is affordable for those earning between 80% and 120% of area median income, or AMI. Households in workforce housing typically earn too much to qualify for programs under HUD. At the same time, they are also unable to afford most quality market-rate apartments.
Many such households include those employed in essential sectors that have stagnant wages. Think teachers, police officers, hospital support staff, delivery workers, and the like. Employees in these sectors may have a difficult time finding adequate housing due to soaring rent growth in many markets.
How Does HUD Support Workforce Housing?
HUD does not offer support programs specifically designed for workforce housing. However, many HUD loans can be used for the development, acquisition, or refinance of these communities. For example, ever-popular HUD 223(f) loans, along with all their benefits — a 35-year term at a low, fixed rate — are potentially great options for investors looking to buy or refinance workforce housing.
There are a number of GSE loan products that support workforce housing, too. One such product is the Freddie Mac® Workforce Housing Mezzanine Loan. This loan has LTV allowances of up to 90% and a minimum DSCR requirement of 1.05x. While it does require at least half of units are set aside for those earning 100% of AMI or below, it may be a good option for many looking to secure mezzanine financing atop an existing, conventional Freddie Mac loan.
Of course, beyond HUD and the GSEs, many workforce housing investors and developers leverage bank loans and other more traditional multifamily financing options. However, these often are accompanied by higher interest rates, greater DSCR requirements, and shorter loan terms.
Related Questions
What are the benefits of financing workforce housing?
Workforce housing can provide a number of benefits to investors and developers. These include:
- Access to a larger pool of potential tenants
- Potential for higher occupancy rates
- Potential for higher rental income
- Potential for higher capitalization rates
- Potential for higher returns on investment
- Potential for greater appreciation of the asset
In addition, HUD loans and GSE loan products can provide a number of benefits to those financing workforce housing. These include:
- Low, fixed interest rates
- Longer loan terms (up to 35 years)
- High LTV allowances (up to 90%)
- Low DSCR requirements (1.05x or lower)
What types of financing are available for workforce housing?
HUD does not offer support programs specifically designed for workforce housing, but many HUD loans can be used for the development, acquisition, or refinance of these communities. For example, HUD 223(f) loans offer a 35-year term at a low, fixed rate and are potentially great options for investors looking to buy or refinance workforce housing.
There are a number of GSE loan products that support workforce housing, too. One such product is the Freddie Mac® Workforce Housing Mezzanine Loan. This loan has loan-to-value allowances of up to 90% and a minimum debt service coverage ratio requirement of 1.05x. While it does require at least half of units are set aside for those earning 100% of area median income or below, it may be a good option for many looking to secure mezzanine financing atop an existing, conventional Freddie Mac loan.
Beyond HUD and the GSEs, many workforce housing investors and developers leverage bank loans and other more traditional multifamily financing options. However, these often are accompanied by higher interest rates, greater debt service coverage ratio requirements, and shorter loan terms.
What are the requirements for financing workforce housing?
The requirements for financing workforce housing vary depending on the type of loan product. HUD loans, such as the HUD 223(f) loan, have a 35-year term at a low, fixed rate and can be used for the development, acquisition, or refinance of these communities. GSE loan products, such as the Freddie Mac® Workforce Housing Mezzanine Loan, have LTV allowances of up to 90% and a minimum DSCR requirement of 1.05x. Bank loans and other more traditional multifamily financing options often have higher interest rates, greater DSCR requirements, and shorter loan terms. Generally, workforce housing is defined as housing that is affordable for those earning between 80% and 120% of area median income, or AMI.
What are the advantages of HUD multifamily loans for workforce housing?
HUD multifamily loans offer several advantages for workforce housing. These include increased LTV allowances, reduced DSCR requirements, and lower mortgage insurance premiums, or MIPs. For example, HUD 221(d)(4) and HUD 223(f) loans allow LTVs of 87% for affordable properties and LTVs of 90% for developments with 90% or more low-income units. Plus, affordable properties are allowed a lower DSCR (to a minimum of 1.15x) in comparison to the 1.20x required for market-rate properties. In addition, HUD multifamily borrowers using the Low-Income Housing Tax Credit (LIHTC) program can also enjoy a reduced 0.45% mortgage insurance premium, in contrast to the 0.65% MIP generally mandated for other properties. For more information, please visit www.hud.loans/fha-hud-insured-multifamily-loans and www.hud.loans/hud-loans-blog/the-opportunity-zones-program-and-hud-multifamily-loans.
What are the eligibility requirements for HUD multifamily loans?
HUD multifamily loans are designed to help borrowers of all experience levels access the financing they need to succeed in the multifamily housing market. The minimum credit score for most programs is just 620, and there are options for borrowers with even lower scores. Eligible properties for HUD multifamily loans must already be encumbered by HUD-insured loans.
For more information, please visit 5 Myths about HUD-Insured Multifamily Loans and HUD 241(a) Supplemental Financing for HUD Multifamily Loans.
What are the advantages of using a HUD-approved lender for workforce housing financing?
Using a HUD-approved lender for workforce housing financing has several advantages. First, HUD-approved lenders are able to offer HUD multifamily financing and other HUD-insured home loans to borrowers. This means that borrowers can access a wide range of loan products, including HUD 221(d)(4) financing, which typically allows for a loan-to-cost ratio of up to 85%. Additionally, if the property is a subsidized housing development, a HUD 221(d)(4) loan can have a maximum loan-to-cost ratio of up to 90%.
Furthermore, HUD-approved lenders must meet specific requirements, including having a specific net worth, maintaining good credit, and having employees with a certain amount of experience in the mortgage industry. This ensures that borrowers are working with a reliable and experienced lender.
For more information, please see Top 5 Advantages of HUD Construction Financing and What is a HUD-Approved Lender?.