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.
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.
To learn more about HUD multifamily loans, simply fill out the form below and a HUD lending expert will get in touch.
What are the eligibility requirements for HUD/FHA loan programs?
HUD/FHA loan programs 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. To learn more about FHA 232 loans, fill out the form here to speak to a HUD/FHA loan expert.
What types of properties are eligible for HUD/FHA loan programs?
Properties eligible for HUD/FHA loan programs include multifamily and healthcare properties with existing HUD-insured debt. These properties are eligible for the HUD 223(f) and HUD 223(a)(7) loan programs. For more information on the HUD 223(f) loan program, please visit www.hud223f.loans/hud-223f-faqs/eligible-properties. For more information on the HUD 223(a)(7) loan program, please visit hud223a7.loan/hud-223a7-faqs/hud-223a7-property-eligibility. To learn more about the HUD 223a7 refinance program, please fill out the form on the website to speak to a HUD/FHA loan expert.
What are the advantages of HUD/FHA loan programs?
HUD/FHA loan programs offer several advantages, including highly competitive, fixed interest rates, loans that are fully assumable with FHA approval, and non-recourse loans. According to data provided by the department, HUD loans endorsed between January and September 2022 had an average fixed interest rate of 3.35%. Borrowers are also able to lock in the interest rate early on in the application process, with a deposit equal to 1% of the loan's amount refunded at closing.
What are the disadvantages of HUD/FHA loan programs?
The disadvantages of HUD/FHA loan programs vary depending on the specific loan program. For example, HUD 241(a) Loans require a variety of third-party reports, including environmental assessments, architectural and engineering reports, and full HUD/FHA appraisals. Additionally, an FHA application fee of 0.30% of the loan amount and a 0.50% FHA inspection fee are both required. A one-time mortgage insurance premium (MIP) at closing is also required, as well as payment of monthly MIPs throughout the duration of the loan.
HUD 232 Loans also have disadvantages, such as requiring that borrower/owner makes regular contributions to a replacement reserve fund. An FHA application fee of 0.30% of the loan amount and an FHA inspection fee of 0.50% of the loan amount are both required. Additionally, both an initial, one-time MIP (mortgage insurance premium) at closing, as well as monthly MIPs throughout the life of the loan are required. Annual audited financial statements from owners are also required.
How do I apply for a HUD/FHA loan program?
To apply for a HUD/FHA loan program, you'll need to do significant preparation. First, you'll need to find an FHA licensed lender. It's a good idea to discuss your project with multiple FHA licensed lenders, so you can understand more about the process and the benefits and drawbacks of potential lenders. Then, you'll need to get all your documentation and approval from HUD. For more information, you can visit this page on our website.
What are the costs associated with HUD/FHA loan programs?
The costs associated with HUD/FHA loan programs vary depending on the specific loan program. For example, the HUD 221(d)(4) loan requires an application fee of usually $25,000 to cover lender due diligence and third-party reports, including an appraisal, phase 1 environmental, construction cost review, market study, plans and specs review, an FHA exam fee of 0.30% paid as 0.15% at pre-application and 0.15% at application, an FHA inspection fee of 0.50% paid from mortgage proceeds, financing and placement fees typically capped at 3.50% of the loan amount paid at closing from mortgage proceeds, and a good-faith deposit (rate lock and commitment) between 0.50% and 1% of the loan amount paid at the time of commitment and refunded at closing. The HUD 241(a) loan requires a variety of third-party reports, including environmental assessments, architectural and engineering reports, and full HUD/FHA appraisals, an FHA application fee of 0.30% of the loan amount and a 0.50% FHA inspection fee, and a one-time mortgage insurance premium (MIP) at closing, and payment of monthly MIPs throughout the duration of the loan.