Are HUD/FHA Loan Programs Only for Affordable Housing?
It's a common misconception that HUD financing is only for affordable housing. In reality, it's available for all types of market-rate properties.
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Editor's Note: This post is a great resource for debunking a few common misconceptions about HUD multifamily loans. But check out our our sister site, Commercial Real Estate Loans, to find the top 5 HUD loan myths of 2022.
Common Myths About HUD Multifamily Loans
One of the most common misconceptions about HUD is that it focuses only on low-income, Section 8, and affordable housing. In reality, the HUD 223(f) program is available for all types of market-rate multifamily properties. Although HUD and FHA programs were created to make sure capital is available for properties, they cover market-rate properties. Despite this, HUD does offer somewhat more favorable terms to borrowers who develop and invest in affordable or subsidized housing.
For instance, HUD 221(d)(4) loans for the construction and substantial renovation of multifamily properties offer up to 85% LTV for market-rate properties, up to 87% LTV for affordable properties, and up to 90% LTV for properties with 90% or more subsidized units. Minimum DSCR limits are similar, with a floor of 1.20x for market-rate properties, 1.15x for affordable properties and 1.11x for properties with 90% or more subsidized units. In regards to LTV and DSCR, HUD 223(f) loans for multifamily acquisition and refinancing have identical terms.
HUD Multifamily Loans Are Available to All, But Nonprofits Do Gain Certain Benefits
In addition, non-profits also gain certain benefits when it comes to FHA multifamily loans, particularly in regards to the HUD 223(a)(7) refinance loan and the HUD 241(a) supplemental loan program, both which are designed for existing HUD multifamily borrowers. For example, both of these loan programs offer up to 90% LTV/LTC for for-profit entities, but offer up to 95% LTV/LTC for non-profits. HUD 232 loans for the construction and substantial rehabilitation of senior living and healthcare properties also provide certain benefits to non-profits; non-profits are allowed up to 80% LTV/LTC, while for-profit entities are only permitted up to 75%.
However, despite all the benefits that HUD provides to non-profits and the developers of affordable and subsidized properties, the terms offered to for-profit, market-rate investors and developers are still better than almost every alternative, including Freddie Mac®, Fannie Mae®, CMBS, and life companies.
For example, most Freddie Mac, Fannie Mae®, and CMBS loans offer a maximum of 80% LTV (70-75% in most circumstances). And, while some Fannie® and Freddie® loans are fully-amortizing, most are not. In contrast, CMBS loans are never fully amortizing. Life companies are perhaps the only lenders that can come close with interest rates, but once again, these loans offer 70% LTV at best and require borrowers to have significant financial strength.
HUD Doesn't Issue Loans; It Only Insures Them
Another common misconception is that HUD loans money to developers and investors. In reality, HUD only insures these loans for the recapitalization, acquisition, rehabilitation, and construction of multifamily properties. The loans themselves are offered by private lenders. However, if a borrower defaults on a HUD-insured multifamily loan, HUD will provide the lender with a certain, pre-determined amount of compensation for their financial loss. So, contrary to what some people think, HUD makes no loans — it only insures loans for lenders.
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