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HUD Multifamily Loans - The Complete Guide

By Terry Painter/Mortgage Banker, Author of The Encyclopedia of Commercial Real Estate Advice – Wiley Publishers, Member of the By Terry Painter/Mortgage Forbes Business Council

 

HUD/FHA Multifamily Loans are underwritten, approved, and guaranteed by the Department of Housing and Urban Development (HUD) which does not provide the financing. This is done by HUD approved lenders. Qualified property types include Apartment buildings, Senior Housing (62-year-old plus), Intermediate Care, and Assisted Living Facilities. HUD Multifamily Loans have the longest fixed rate terms of 35 to 40 years, the highest LTV’s, and lowest fixed rates.

Advantages of HUD Multifamily Loans

 Property Types:  Multifamily, Mixed-Use, Senior Housing, Healthcare Properties

 

*Highest LTV at 80 – 90% *1.176 DSCR Market Rents
*Cash Our for Any Reason *1.15 DSCR Affordable Rents
*Unlimited Loan Size *Same Rate Construction Roll over to Perm
*35 Year Fixed Rates *No Global or Debt to Income Ratio
*40 Year Fixed Rate New Construction *Assumable
*No Tax Returns Required *Non-Recourse
*Supplemental Financing Available *Lowest Long Term Fixed Rates.
*35 Year Amortization Existing Property *40 Year Amortization New Construction.

*Rate can be Lowered in the Future with a Loan Modification

About this Article

If HUD Insured Multifamily Financing has grabbed your interest, it’s essential that you take the time to educate yourself on not only the pros, but the cons as well. I can assure you there are just as many of each. So, I wrote this article for our borrowers to include just about everything they might need to know about the subject from my 24 years making these loans. Skim by any subjects that don’t grab your interest and click on the links for any topics you would like to learn more about. And here’s a HUD Multifamily Loan Glossary with 74 terms defined for a fast look up.

 

The Difference Between FHA and HUD Loans

Let’s get this out of the way first: Everyone seems to use FHA and HUD as if they are synonymous. I can understand this as The Difference Between FHA and HUD Loans is a puzzle for most people. The Federal Housing Administration (FHA) came first in 1934 and became a part of HUD in 1965.The difference between FHA and HUD is that FHA oversees and guarantees low down payment and low credit score residential loans for moderate to low-income homeowners. HUD oversees FHA, but primarily sets guidelines and guarantees multifamily loans of 5 units or more for real estate investors. Professionals who work on Multifamily Loans know to call them HUD Loans. 

 

More Advantages of HUD Multifamily Loans 

Go here for a comprehensive list of all the advantages of HUD Multifamily Loans.

Video on the Pros and Cons of HUD Multifamily Loans

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Video about HUD Multifamily Loans

The Highest LTV Multifamily Loan?                                                                                                                                         

So, if you have been wondering What is The Highest LTV Multifamily Loan in America, you guessed it – HUD! For market rate apartment buildings, HUD LTV’s go up to 85% on a purchase, and on a refinance without cash out. 80% on a refinance with cash out.  And up to 87% for HUD Affordable Rent Multifamily Loans, and 90% for Subsidized Rent Apartment Buildings. Click on this link if you are wondering What is the difference between HUD and Fannie Mae Multifamily loan programs in detail. HUD out performs as far as LTV, DSCR fixed rate term, interest rate and amortization. Both loans are non-recourse, but only Fannie Mae offers a partial term interest only option which HUD doesn’t have. Click here to view the guidelines for Fannie Mae Multifamily Loans, and Freddie Mac Multifamily Loans.

 

HUD Multifamily is the Best for Leveraging High

HUD Multifamily Loan Rates tend to be the lowest long-term fixed rates and when combined with the longest amortization you can count on leveraging high. No other multifamily loan program can fix the rate for 35 years with a 35-year amortization on acquisition or refinance. And rates are fixed for 40 years with a 40-year amortization for new construction or substantial rehabilitation.

 

What is truly astounding is that these fully amortizing loans have a lower 35-year fixed rate than most 10-year fixed rate loan programs. Few banks can fix an apartment building rate for longer than 5 to 10 years and most have a 25-year amortization at best. 

 

Note that interest rates are lower if the property is built green. Compare today’s HUD Multifamily Loan Rates with Fannie Mae Multifamily Loan Rates, and Freddie Mac Multifamily Loan Rates. And while you are at it, why not compare those with Multifamily Loan Rates from 12 loan programs.

 

HUD Multifamily Loans Are Non-Recourse

The icing on the cake is that these are non-recourse loans.  This means you do not have to personally guarantee the loan and risk losing some or all your assets should the property fail, and the loan go into default. Non-recourse financing allows you to take more risks and invest in more investment properties. Although it will still be painful, should the property go into default with a non-recourse loan, all you have to do is to hand the keys to the property over to the lender. That’s it. And then you get to avoid the headache with foreclosure.

 

On the other hand, with recourse financing, after foreclosure – the lender will be awarded by the court a deficiency judgement that allows them to sell the property at public auction and recover any losses from your other assets. Often, they get a lower price than your principal balance. They can then lien any of your other assets to pay for the deficiency including the arrears on interest and their legal costs.    

 

HUD Multifamily Loans are Great for Raising Cash from Investors 

If you are thinking about using mostly other people’s money for the down payment, HUD Multifamily loans are one of the most user-friendly loan programs to pull this off. Banks almost always want the sponsor to have more and often the most skin in the game. And on a more sophisticated level if you want to form a real estate syndication which allows you to raise most of the down payment from passive investors – you guessed it – HUD can do that! Most banks seem irritated by syndications and don’t seem to understand them. 

 

Keep in mind that it’s so much easier to raise cash from high-net-worth passive investors whose only role is to contribute cash, than active investors who will want to control the property with you and make major decisions by consensus. But most passive investors will only want to participate if the financing is non-recourse, so they don’t have to worry about being asked to guarantee the loan.

 

Get a Lower Rate in the Future with a Loan Modification

This is one of the very best features that only HUD has and very few know about.  Should rates come down in the future, HUD the borrower to apply through their HUD lender for an Interest Rate Reduction Loan Modification. The sole purpose is to lower the monthly payments. The current loan amount and remaining term of the mortgage stay the same. There are nominal costs involved. Typically a small fixed lender fee, legal fee and if the existing loan is more than a few years old, a new property condition report will be needed called a PCNA. A new appraisal will not be required. The entire process can be completed in 90 days.  

 

HUD Multifamily Loans a Plus for Remodeling or Rehabbing

I love it when I can ride in on my white horse and make amazing things happen with HUD. Last month my team and I booked a $7,000,000 HUD 223 (f) Loan which is for the acquisition, refinance, or minor rehabilitation of apartment buildings. Our client needed to refinance a 24-year-old, 86 unit in Oklahoma City. The owner wanted to take cash out to do extensive remodeling and raise rents. He wanted the longest fixed rate term with the lowest rate possible. His bank could only fix the rate for 7 years and give him a 20-year amortization. They were willing to do the loan but cut his remodeling budget in half. They felt he was going to over improve the property for its age and current rents.  

 

We did some market research and found the current rents were about 18% under market. This meant they could easily support the size HUD loan he wanted. HUD was such a good fit because one of their mandates is to bring older properties into very good condition which is a match with the borrowers objective. With a much lower rate than his bank, a 35-year amortization, and a 1.176 DSCR, we could get all the remodeling done with his payments being just slightly higher than his bank’s much smaller loan offer. Note that the HUD 221(d)(4) Loan will need to be used  for major rehabilitation projects. 

 

Estate Benefits of HUD Multifamily Financing

The borrower loved that this was the last loan he would ever need to get for the property. He was going to keep this property forever and pass it on to his kids in his trust with a provision that they could not sell the property. At 64 years old, it was unlikely he would outlive his 35-year fixed HUD loan. But what seemed to impress him the most were the estate benefits of non-recourse loans. Since they are made to a single asset ownership entity like an LLC and not to the individual – upon the owner’s death his heirs would not have to worry about qualifying for the existing financing or new financing.  They would simply be inheriting the LLC that already owned the property. And the existing HUD loan was already solely made to this LLC. This meant our borrower could sleep better at night knowing that not only did he have a loan that would continue until the principal was paid off, but his heirs would have the property’s income without having to apply for a new loan.     

 

HUD Multifamily Rate Lock

Most banks have the rate float until closing. Many large and regional banks can lock the rate at application with a refundable .50% rate lock deposit. Fannie and Freddie Multifamily loans cannot be locked until loan approval with a 1.00 to 2.00% refundable rate lock deposit.  Keep in mind that the Rate Lock on HUD 223(f) and HUD 221(d)(4), is done a day or two after HUD approves the loan with a .50% refundable at closing rate lock deposit. Closing is about 30 days later.  

 

HUD Multifamily Loans Have the Lowest DSCR

HUD loans also have the lowest Debt Service Coverage Ratio (DSCR) of all multifamily loan programs at 1.176, on market rate properties, 1.15 on affordable rate properties, and 1.11 on subsidized rent properties. Compare that to where banks are at 1.25 to 1.35 DSCR. With HUD Multifamily Loans having the highest LTV, lowest rate, longest amortization and lowest DSCR, these loans produce the highest leverage multifamily loan in America based on the property’s net operating income. 

 

HUD Multifamily Loans are Assumable

HUD Multifamily Loans are assumable with a .50% assumption fee if you want to sell the property in the future. The new owner just has to qualify under the same guidelines that you qualified under. As long as the buyer intends to have quality property management, HUD loans are easier to assume than almost any other assumable commercial mortgage. And because most are made at high leverage with 35 to 40 year fixed rate terms, there is great demand for assuming HUD loans. 

 

HUD is the Best for Lending on Multifamily During Recessions

Recessions happen on average every 6 years in America. I have gone through three.  Prior to each some banks stopped doing commercial investment property loans entirely, and many more banks simply made underwriting guidelines so stringent that very few deals could qualify. They did this by raising DSCRs and stressing rates up so high that they rarely made a loan at over 65% LTV. Then they worked with very conservative appraisers that seemed to always deliver low valuations. This ensured smaller loan amounts. And ground up construction was just about eliminated entirely.

 

During each recession, HUD Multifamily has been my number one loan program of choice. Hard economic times just don’t seem to affect their lending guidelines much.  Unlike banks that are regulated by the Feds and require multiple sources of income verified on 3 years of tax returns, HUD Multifamily loans are made to the property's financial strength and location first, the borrowers experience second and financial strength third. HUD doesn’t look at personal income and does not require tax returns which allows many self-employed investors who show low net income on tax returns to qualify.

 

What are the Disadvantages of a HUD Multifamily Loan?

*Takes a Long Time to Close *Older Properties May Have to be Remodeled
*Higher Closing Costs *Replacement Reserves Required
*Minimum Loan $3,000,000 *Working Capital Reserve for Construction
*Annual Financial Audits  *Davis-Bacon Wages Required for Construction
*Biannual Draws for Owners *Mortgage Insurance Required

Okay, So, click on this link to view more detail about the Disadvantages of HUD Multifamily Loans. Number one is the time they take to close. We are talking about 7 months for acquisition and refinance, and 9 – 10 months for new construction. So these loans are just not user friendly for purchases. Often we have to close purchases with a temporary bridge loan and then refinance with a HUD 223(f) Loan. But if you are investing for the long buck – in other words you plan to keep the property for a while, it is well worth the time.  

 

HUD Multifamily Loans have higher closings costs and require replacement reserves.  These reserve funds go into a rainy day fund each month to cover the cost of small replacements or repairs such as a hot water heater up to replacing the entire roof.  These loans only allow the property owner to draw an income from the property every six months, which is not that big of a problem if you have other sources of income.   There is a financial audit required annually, which can be on the expensive side.  

                                                                                                                                        

HUD Multifamily Loan Requirements

For over 30 years prior to the Great Recession, HUD Multifamily Loan Requirements were exceptionally lenient. This is because HUD’s mandate was and still is today to create a lending platform that will provide more quality housing in America. In 2009, in the grasp of the great recession, and with many Multifamily Loan defaults on their books, HUD tightened their lending requirements. Where their focus had been on the strength of the property, this changed to the experience and financial strength of the key principals being equally important.

 

Today, buyers and developers need current multifamily ownership experience, good credit (minimum credit score not specified) and no tax liens. Experience owning a similar size apartment building is essential. If you don’t have this, consider bringing in a partner that does. The good news is that HUD requires much less financial strength than regional banks, large banks, Fannie Mae and Freddie Mac. HUD can do this because they require stronger controls over property management, maintenance, operating income, and owner draws.

 

While most banks and credit unions prefer lending in their own back yards, and most other lending programs prefer larger cities, HUD Multifamily Loans allow for the purchase, refinance, rehabilitation and ground up construction for properties anywhere in the country and in any size MSA. Click on this link to view much more detail about HUD Multifamily Loan Requirements.

 

HUD Multifamily Occupancy and Vacancy Requirements

In 2009 as a result of the great recession, minimum occupancy on a purchase or refinance loan was increased from 80% to 90% for 90 days. Stronger historical occupancy was also required. At that time, minimum vacancy was increased from 5% to 7%. This has had the effect of lowering loan amounts on some deals. In markets that have very low vacancy of let’s say 5% or less, you can request a waiver from HUD to underwrite to 5%.  

 

HUD Multifamily Minimum and Maximum Loan Sizes and Units                                                                                                                                           

If you are interested in purchasing or refinancing an apartment building and wondering what is the Minimum Loan Amount for the 223(f) Loan, most HUD lenders prefer a purchase or refinance loan of at least $5 million but some will go down as low as $3 million. This is because of all the paperwork, and the high cost of underwriting and processing these loans. Most HUD lenders prefer Construction and major rehabilitation loans to be a minimum $10 million and up. The good news is that there really isn’t a maximum loan size, however, HUD has tighter underwriting guidelines on loans over $75 million. 

 

Buying Multiple Homes with a HUD/FHA Loan?

If you are wondering, Can I Buy Multiple Homes with a HUD/FHA Loan, the answer is No and Kind of. First, if you want a FHA Residential loan, you can buy a duplex and rent one side out and qualify for HUD Residential Financing. If you are wondering How Does HUD Define Multifamily, it is 5 units or more in the simplest definition. On the multifamily side, HUD doesn’t like financing multiple 1 – 3-unit buildings in any form period.  However, a bunch of fourplexes that are contiguous on individual tax lots or one tax lot for all is acceptable. Keep in mind that one fourplex is still considered residential. Two fourplexes on individual or one tax lot could work for HUD Multifamily.    

 

HUD Multifamily Financing Programs

For this article I am going to go through our top three most popular HUD Multifamily loan programs. 

 

HUD 223(f) For Acquisition, Refinance or Minor Rehabilitation

Be sure to click on this link for extended terms, guidelines, and qualifications for the HUD 223(f) Loan program. The best features are the high LTV and the 35-year fixed rate and 35-year amortization. Because the loan can take 6 months to close, it is not very user friendly for purchases. But if the seller can wait, you can likely put less down than most other loan programs. If you are buying a property that needs more expensive upgrades to raise rents, the time will be worth it.

 

On the refinance side, if you do not need cash out you can borrow up to 85% on market rent properties. This goes down to 80% LTV with cash out. But as mentioned, you can use the cash for any reason.

 

HUD 221(d)(4) For New Construction and Substantial Rehabilitation

Be sure to click on this link for extended terms, guidelines and qualifications for the HUD 221(d)(4) Loan. This is my favorite loan program as my passion is commercial ground up construction. What I love about it is that I can deliver a much higher loan to cost than with bank or private financing. Why? Because most other construction lenders start out by constraining their loan to cost of the construction loan to what they project the value of the completed stabilized property will be. And they usually order a conservative appraisal that forecasts a lower future value. Then they project an extra high permanent loan rate which also produces a lower loan to cost. They can’t possibly know what the value and rates will be 18 to 36 months down the road.   With a HUD loan, there is no appraisal (except for the land) so the loan size is based solely on the projected net operating income.

 

Secondly, I love that you get up to a 3-year construction loan that rolls seamlessly over to the perm loan. This saves you the headache of looking for another loan once the construction loan matures and is incurring more loan expenses. Better yet, when you lock the rate on your construction loan, you get the same rate on your 40-year fixed permanent loan. You can say goodbye to living with the uncertainty of what your perm loan rate will be in 2 – 3 years when the property is built and occupied. 

 

HUD 232/223(f) For Acquisition or Refinance of Senior Intermediate Care, Assisted Living, and Licensed Nursing Homes

Click on this link for extended terms, guidelines and qualifications for the HUD 232/223(f) Loan. This loan combines multifamily with healthcare for the acquisition, refinancing and minor rehabilitation of Independent Senior Living, Intermediate Senior Living, Assisted Living and licensed Nursing Home facilities. Most of these properties have a skilled nursing component and must be licensed by the state. With our aging population there is going to be a need for even more of these facilities to be built. 

 

These loans are more difficult to analyze and get pre-approved because they are actually two business in one. They combine a multifamily property with a senior services and health care business. The difficulty comes from the often drop in income from residents that are on Medicaid paying substantially lower rents. And then the services component can fluctuate creating inconsistent financials. For this reason, HUD has an extra high Debt Service Coverage Ratio (DSCR) of 1.45 which constrains the loan size down. Compare this with market rent apartment buildings where HUD has the DSCR at 1.176. 

 

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HUD Loans are one of the best options with the current level of interest rates. For a complete guide to HUD Multifamily Loans please go here:

HUD Multifamily Loans - The Complete Guide