Preparing for Your Next HUD Audit
If you own an affordable property with a HUD-backed loan, you need to be prepared for this intensive annual review.
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If you own a property with a HUD-insured loan, you’re likely very familiar with the Department of Housing and Urban Development’s audit processes. Conducted annually, a HUD audit ensures that you — and your residents — are in compliance with the eligibility requirements of your affordable community.
These audits can present challenges, but preparation is the key. The third chapter of HUD’s audit handbook outlines what an audit will entail for your multifamily asset, but it is generally wise to ensure you have engaged a tax professional experienced with HUD audits to oversee your preparation before the actual audit commences.
First, it’s important to understand the timeline involved in such an audit. HUD requires audited financial statements — along with the auditor’s opinion and a report on ownership and compliance — no later than 90 days after the end of the fiscal year.
So, when you’re making your preparations for an upcoming HUD audit, consider some of the documentation you will need to have on hand:
Financial Information
It sounds obvious, but the main part of the audit will be in analyzing your financial records. This includes all documents like your property’s balance sheet, statement of profit and loss, statement of cash flows, and descriptions of accounting policies. Year-end statements for associated bank accounts — for your operating account, your replacement reserve account, and your security deposit account — are also essential.
Ownership, Management Changes
You will need to outline and document any changes in the ownership structure of your asset, even if it’s something as simple as a change of address. If a joint venture partner has exited or entered the ownership structure, you will need to clearly state these changes and may need to provide relevant forms, like HUD’s Form 2530.
This is also true if there are changes within how your property is managed. Should you change management companies, you will need to provide, at a minimum, details of the new property manager along with proof of certification.
Insurance, Tax Information
This category would include insurance declarations, which must clearly state the period — and amount — during which your property is covered, along with the overall cost of premiums for your real estate insurance coverage. In terms of taxes, you will also need to provide evidence of all property taxes that the owner has paid throughout the year, with relevant invoices.
Mortgage Information
You will need to have all of your loan documentation, including the note and its deed of trust, plus the amortization schedule. The audit will assess your process for making mortgage payments and your performance in paying during the fiscal year. Most auditors will need at least one monthly mortgage statement or invoice as part of this process. If any part of your debt has been refinanced, you will need to provide evidence of this as well.
Tenant Details
The audit will also assess how the property is handled with respect to its tenants — both present and those applying or waitlisted. The auditor will need to fully understand the procedure for accepting applications, determining eligibility, and how rental rates are set.
As part of this process, the auditor will generally examine a sample of tenant files, which include accepted and rejected tenants, from the past fiscal year. These files will be used to ensure processes are in place, are working correctly, and are not violating HUD requirements on discrimination.
Other Items
Other documentation which is generally required includes the results of the past fiscal year’s audit — including specific feedback and observations — along with details of any legal issues, IRS or state tax notices, and many others. For properties that utilize Low-Income Housing Tax Credits or rural development credits, additional requirements, like providing HAP contracts, will also apply.
While the list of documentation necessary to fulfill the requirements of your property’s HUD audit is long, and, as you can see, in many cases goes beyond what would be required in a standard audit of a multifamily property, it is an essential part of ensuring your asset qualifies for its HUD-insured affordable housing loan.
Related Questions
What are the key components of a successful HUD audit?
The key components of a successful HUD audit include providing financial documents such as the property's balance sheet, statement of profit and loss, statement of cash flows, and descriptions of accounting policies. Year-end statements for associated bank accounts, such as the operating account, replacement reserve account, and security deposit account, are also essential. Other documentation required includes the results of the past fiscal year's audit, including specific feedback and observations, along with details of any legal issues, IRS or state tax notices, and many others. For properties that utilize Low-Income Housing Tax Credits or rural development credits, additional requirements, such as providing HAP contracts, will also apply. This documentation is essential for ensuring your asset qualifies for its HUD-insured affordable housing loan.
What documents should I have ready for a HUD audit?
You will need to have all of your loan documentation, including the note and its deed of trust, plus the amortization schedule. The audit will assess your process for making mortgage payments and your performance in paying during the fiscal year. Most auditors will need at least one monthly mortgage statement or invoice as part of this process. If any part of your debt has been refinanced, you will need to provide evidence of this as well.
In addition, you will need to have all of your financial records. This includes all documents like your property’s balance sheet, statement of profit and loss, statement of cash flows, and descriptions of accounting policies. Year-end statements for associated bank accounts — for your operating account, your replacement reserve account, and your security deposit account — are also essential.
For more information, please visit Preparing for Your Next HUD Audit.
What are the most common mistakes made during a HUD audit?
The most common mistakes made during a HUD audit are related to financial records and tenant details. Financial records should include all documents like your property’s balance sheet, statement of profit and loss, statement of cash flows, and descriptions of accounting policies. Year-end statements for associated bank accounts — for your operating account, your replacement reserve account, and your security deposit account — are also essential.
The audit will also assess how the property is handled with respect to its tenants — both present and those applying or waitlisted. The auditor will need to fully understand the procedure for accepting applications, determining eligibility, and how rental rates are set. As part of this process, the auditor will generally examine a sample of tenant files, which include accepted and rejected tenants, from the past fiscal year. These files will be used to ensure processes are in place, are working correctly, and are not violating HUD requirements on discrimination.
Not having the necessary financial records and tenant details on hand is the most common mistake made during a HUD audit. It is important to be prepared and have all the necessary documents ready for the audit.
What are the consequences of failing a HUD audit?
Failing a HUD audit can have serious consequences. According to the HUD Audit Handbook, if a property fails to meet the requirements of the audit, HUD may take action to suspend or terminate the loan, require additional collateral, or take other corrective action. In addition, HUD may require the borrower to reimburse the government for any losses incurred due to the failure of the audit.
How can I ensure my property is compliant with HUD regulations?
To ensure your property is compliant with HUD regulations, you should review the HUD 232 Insurance Requirements and make sure your property is covered by property and liability insurance for the duration of the loan. The first year’s premiums must be paid in full at closing, and you must provide your lender with evidence of insurance on or before the closing date or before the policy’s renewal date.
You should also review HUD's audit handbook and engage a tax professional experienced with HUD audits to oversee your preparation before the actual audit commences. HUD requires audited financial statements — along with the auditor’s opinion and a report on ownership and compliance — no later than 90 days after the end of the fiscal year. You should also have the following documentation on hand:
What steps can I take to prepare for a HUD audit?
Preparing for a HUD audit is key to ensuring compliance with the eligibility requirements of your affordable community. The third chapter of HUD’s audit handbook outlines what an audit will entail for your multifamily asset. It is generally wise to ensure you have engaged a tax professional experienced with HUD audits to oversee your preparation before the actual audit commences.
When you’re making your preparations for an upcoming HUD audit, consider some of the documentation you will need to have on hand:
- Financial records, including balance sheet, statement of profit and loss, statement of cash flows, and descriptions of accounting policies
- Year-end statements for associated bank accounts, such as operating account, replacement reserve account, and security deposit account