HUD and the FHA

The Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) were founded as two separate entities. In 1965, the FHA became part of HUD, after they began to share far more responsibilities than either had originally planned. HUD oversees and guarantees both residential and multifamily lending and insurance programs.

The FHA deals primarily in residential lending, aiding in the purchase of primary residences for Americans by providing loan insurance for single-family homes and multifamily properties with up to four units. The FHA is also responsible for the overall management and administration of HUD's multifamily housing programs. HUD ultimately provides the insurance, however. 

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. In reality, HUD only underwrites and insures these loans, which are provided by other lenders. 

The Versatility of HUD Financing

The FHA or HUD 223(f) program was created for the refinance or acquisition of multifamily properties. Many believe that HUD only 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.

In contrast, the HUD 221(d)(4) loan, which we’ll discuss shortly, was designed for the construction or substantial rehabilitation of these same property types.

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 includes market-rate apartments, as well as affordable properties and subsidized housing.

HUD Loans 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 million to $100 million or more. In general, there is no hard cap or minimum for loan amounts. However, because of the costs involved with originating HUD-insured multifamily development loans, smaller developers may be hesitant to select these. Thankfully, the FHA has embraced change and new operational efficiencies over the years. Despite that, HUD 221(d)(4) loans can still take between eight months to a year to close, and they often require an experienced financial intermediary to assist during the entire process.

HUD Loan Amortizations and Maturities

FHA-insured financing offers the longest terms in the industry. But something else also 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 offer 40 years of fixed-rate financing plus up to three additional years of financing during the construction period. HUD 221(d)(4) provides one of the very few, if not the 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, since they are government insured, FHA and HUD multifamily loans earn a AAA credit rating. This leads to rates that are lower than Fannie Mae® and Freddie Mac®’s 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 — 223(f) loans may take 120 days, and 221(d)(4) 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 223(f) loan isn't vastly different from originating a Fannie® or Freddie® multifamily loan. Other requirements involve things like: 

• Environmental assessments to identify lead-based paint and asbestos reviews for properties built before 1978.

• New property must not be located within a 100-year flood plain.

• Substantial rehabilitation loans require adherence to Davis-Bacon labor standards.

Affordable Properties

HUD multifamily loans include specific benefits for affordable properties. These include increased LTV allowances, reduced DSCR requirements, and lower mortgage insurance premiums, or MIPs.

HUD multifamily loans such as the HUD 221(d)(4) and HUD 223(f) are also a great fit when combined with the Low-Income Housing Tax Credit (LIHTC) program, which offers investors a dollar-for-dollar federal tax credit in order to encourage investment in affordable properties. These loans also fit well with the Rental Assistance Demonstration (RAD) program, which allows properties using certain HUD legacy housing assistance programs to convert their properties to long-term Section 8 HAP (Housing Assistance Payment) contracts.

Conclusion

HUD-insured loans may not be for everyone. They certainly are not advantageous for borrowers seeking small balance loans, as fixed origination costs translate to higher costs. If your need for financing is time sensitive, an FHA-insured multifamily loan may also not be the best fit. In general, HUD-insured multifamily loans also do not fit the needs of merchant builders.

Navigate our website as well as Multifamily Loans to understand all the multifamily financing options available in order to make the best choice. No matter what kind of loan you choose, having the guidance of an experienced intermediary financing the acquisition, development, rehabilitation, or recapitalization of apartment properties should result in a reasonably seamless process.