HUD Multifamily Loans and Rates

Today's HUD Multifamily Loan Rates 1/23/2023

	Green	Standard	Fixed-Rate Term/Amortization
Refinance/Purchase - 223f	5.23%	5.58%	35 years
New Construction - 221 d4	5.86%	6.26%	40 years

* Rates Includes Mortgage Insurance Premium

(Scroll Down to See Rates for Our Top HUD Multifamily Loan Programs)

2023 Commercial Interest Rate Outlook

By Terry Painter/Mortgage Banker, Author of “The Encyclopedia of Commercial Real Estate Advice”. 

January 1, 2023

The Truth About How Long Term Commercial Rates are Determined

Sorry if this article starts out boring because I’m about to throw a lot of numbers at you. But before I do, I will disclose that it looks like rates are going to stay high in 2023.   Over the past year to lower inflation, the Feds have raised short term interest rates 8 times. We are talking about the Federal Funds Rate and Prime Rate. During this time the Federal Funds Rate (the rate the Feds lend to banks) went from .25% to 4.50%.  Jamie Dimon, the chairman of Chase Bank, predicts that this rate will go up to 5% and perhaps even 6.00% if there is a recession by the end of 2023. https://www.cnbc.com/2023/01/19/jamie-dimon-says-rates-will-rise-above-5percent-because-there-is-still-a-lot-of-underlying-inflation.html  Prime rate also goes up with each increase by the Feds and over the past year has gone from 3.25% to 7.50%.

 

So, is the Feds’ raising short term rates at breakneck speeds the cause of long-term rates going up so much over the past year? Most people certainly think so, but the answer is actually “kind of”. Long term rates are not set to automatically go up when short term rates rise. But indirectly, they do follow the direction of short-term rates. This is because when the federal funds rate goes up, the 10-year treasury yield seems to always follow which is tied directly to long term rates as you will see in the next paragraph.

 

All long-term commercial fixed rates (residential too) are calculated by starting with a real time US Treasury Yield Index and adding to this a margin. Let’s use Fannie Mae’s 10-year fixed multifamily rate as an example. On December 19, 2021, the 10 Year Treasury Index was at 1.37%. Fannie then added a margin of 2.20% for a rate of 3.57%.  Today the 10-year treasury is at 3.41% and Fannie has added a margin of 2.16% for a rate of 5.57%. Residential rates are even higher with the average 30-year fixed at 6.33% today. On October 20,2022, the ten-year yield was at 4.33% and the margin was at 2.52% for a whooping all-in rate of 6.85%.

To make matters worse, most lenders create a double whammy by raising the margin when treasuries go up to counter a higher perceived risk. It would be nice if they did the opposite – right?! So that is the truth on how long-term mortgage rates are derived. To find out more about this process in detail, you can refer to the section in my book: “The Truth About How Commercial Lenders Set Rates, Terms and Fees”.

Why Have Long Term Mortgage Rates Soared?

Long term mortgage rates have come down the past two months which is a good sign that they will not got up to the high sixes again in the near future. But with the Feds raising rates as their main weapon to fight inflation throughout 2023, they will continue to raise short term rates. This as mentioned has a trickle up effect on long term rates.

The Feds have some other weapons in their bag of tricks. They purposely kept mortgage rates artificially low by purchasing massive amounts of treasury bonds during the great recession, and again during the coronavirus recession. Their goal was to stimulate the economy and increase inflation which was close to zero. By purchasing as much as $80 billion per month in treasury bonds, they increased the demand, which lowered treasury yields, which lowered long term mortgage rates. At the same time, they purchased large amounts of mortgage back security bonds to add more liquidity and further reduce mortgage rates. Yes, both these practices are the same as printing money and added massively to the federal deficit. The Feds ended this practice in March of 2022, which – what do you know? – just happens to coincide exactly with when long term rates started going up.

Long Term Commercial Mortgage Rate Predictions for 2023

At the writing of this article, long term mortgage rates are continuing to decline slowly as a reflection of the 10-year treasury yield coming down. With inflation cooling slowly to 6.5% in December 2022 from a high of 9.1% in July of 2022, the Feds may elect to only increases rates .25% to .50% at their next meeting on January 30 – February 1, according to Reuters: https://www.reuters.com/markets/us/fed-could-hike-rates-by-25-or-50-basis-points-feb-1-daly-tells-wsj-2023-01-09/  The conclusion here is that long term rates will continue to go up this year until inflation dips to the Feds’ sweet spot of around 2%.  

 Connecting the dots, I predict that long term commercial rates will seesaw a bit through the first half of 2023 and reach a low of 5.2%. Then if inflation doesn’t cool off enough they will increase during the second half to 5.7%.  According to CNBC,  most economists are predicting a recession in 2023: https://www.cnbc.com/2022/12/23/why-everyone-thinks-a-recession-is-coming-in-2023.html If this happens and inflation doesn’t cool enough, commercial rates will likely climb above 6% as the year goes on with residential rates climbing even higher. So don’t expect to see rates in the mid to high threes again for a long time. 

 

UPDATED: May 18, 2021

By Terry Painter/Mortgage Banker,  Author of “The Encyclopedia of Commercial Real Estate Advice” Publisher – Wiley.  Member of the Forbes Real Estate Council

 

In essence, HUD Multifamily loans can be used for acquiring, refinancing, rehabbing, or constructing market rent, as well as affordable multifamily properties. With the lowest non-recourse long-term rates fixed for up to 40 years, they outperform any other multifamily loan product in the United States.

 

Pros of HUD Multifamily Financing

We've been doing HUD Multifamily Financing since 1999 and I can tell you that there is no other apartment building financing that can compete with the quality of what HUD has to offer. Here are the main benefits: 

 

1. Lowest Long Term Fixed Interest Rates – The rule of thumb on all commercial loans is the longer you fix the rate, the higher the rate. Not so on a HUD multifamily loan, and no one fixes the rate for longer. On March 15th, 2021, we locked a $13 million loan on a green recently built 90-unit apartment complex in Beaumont, Texas at a rate of 2.96% fixed for 35 years. On a new construction roll over to a permanent loan, the rate can be fixed for 40 years.

 

2. Highest Loan to Value (LTV) – Up to 80% with cash out and 85% without cash out. Cash out can be used for any reason. This goes up to 87% for affordable  rent properties and 90% for properties that have at least 90% rental assistance.
 

3. Longest Amortization – Up to 35 years on a multifamily purchase or refinance and up to 40 years if you use a HUD 221(d)4 loan for the construction. 

 

4. No Tax Returns Required – HUD Multifamily loans are made mostly to the property and not as much based on the financial strength of the borrower. So only the income of the property is taken into consideration – not the borrower’s personal income

 

5. The Loan is Non-Recourse –  Unlike recourse loans that just about all banks have, non-recourse means there are no personal guarantees required from key principals. This makes it so much easier to raise investors who will not have to worry about their bank and security accounts, homes, autos being at risk if the property fails and goes into foreclosure. For more on non-recourse loans go to: Non-Recourse Loans

 

6. Lowest Debt Service Coverage Ratio (DSCR) – The lower the DSCR, the higher the loan amount. Where most multifamily loan programs have a DSCR of 1.25, HUD loans only require a 1.17 DSCR. For more on DSCR go to: Debt Service Coverage Ratio

 

7. Loan is Assumable – If you decide to sell the property, your loan can be assumed by the buyer for a .50% fee. Almost all other commercial loan products charge 1.00% for this.

 

 

Cons of HUD Multifamily Financing

1. Only for Larger Loans – Because of the high loan expenses, HUD multifamily loans only really make sense for loan amounts of $2,500,000 and above on purchase and refinances, and $6,000,000 on ground up construction, and major construction.

 

2. Annual Audits Required – A CPA prepared audit of the property’s financials has to be done annually. This can cost $3,000 or more.

 

3. Annual Inspections from HUD – As long as you keep the property in great condition this will not be a problem. Just keep in mind that HUD’s mandate is to provide more quality housing in America. So they do require you to keep the property condition up including the parking lot, walkways, common areas and landscaping.

 

4. Higher Closing Costs – Because these loans are guaranteed by HUD with the full credit strength of the United States Government, and they go up to 85% LTV, there is an initial cost for mortgage insurance, and then a monthly cost added to the rate. Expect at minimum 1.00% financing fee, plus HUD charges a .30% fee to approve the loan. There are also high costs for lender legal expenses.  Because of the low interest rate and long amortization (35 – 40 years), these expenses will not usually increase your loan payments and can be financed with the loan.

 

5. Long Time to Close –  Expect a HUD multifamily 223(f) for refinance or purchase to take 7 – 8 months. And a 221(d)4 for new construction or substantial rehabilitation to take up to a year to close. For this reason, these loans usually do not work well for purchases. 

 

6. Property has to be in Very Good Condition – Unless you are planning on rehabbing the property, HUD loans require the property to be in or brought up to very good condition. This will add more to the cost of the project for older properties.

 

7. Replacement Reserves Required – HUD will require an initial contribution to a replacement reserve fund starting from $400 per unit per year on up.  This is your money to be used as needed to make repairs and replacements for the property.

 

HUD multifamily loans make the most sense if you need a loan of preferably $3 million dollars or higher and are going to hold the property long term. Why? Because this will be the last loan you will need to get. Where most commercial loans mature in an average of 10 years, and you have to refinance over and over, HUD loans don’t mature until the property is paid off in 30 – 40 years. So you won’t have to worry about having to refinance when interest rates have soared. On the other hand, because these loans are high leverage and assumable with a .50% fee, they can work well for someone who wants to hold the property for 5 years or more, then sell if they get an offer they cannot refuse. They also make sense if you need a high loan to cost construction. Where most multifamily construction loans only go up to 75% of cost, HUD multifamily construction loans go up to 85% of cost. 

 

Yes, the cons are somewhat daunting on HUD Multifamily Loans, but in my opinion, the very low long-term fixed-rate combined with a 35 – 40 year amortization will create such a low monthly payment that will make it worth it. 

 

To learn more about HUD Multifamily, please read on. I have highlighted the guidelines and terms for 3 HUD Multifamily loan programs where you can check to see if they will be a fit for you.

 

Types of HUD Apartment Multifamily Loans:

Multifamily Acquisition or Refinance Loan

Multifamily New Construction or Major Rehab Loan

Multifamily Streamline Refinance
 

MULTIFAMILY ACQUISITION OR REFINANCE LOAN - HUD FHA 223 (f)  Assumable non-recourse financing for the purchase or refinance of existing multifamily properties. Lite rehab allowed. Up to 85% LTV. Maximum term and amortization 35 years. 

• Minimum Loan:  $2,500,000    Maximum Loan:  None
• LTV:  85% for market rates, 87% for affordable, and 90% for rental assistance, 80% for cash out
• Rates Fixed up to 35 years
• Term: Up to 35 Years    Amortization:  Up to 35 years
• Minimum DSCR:  Market Rents: 1.176, Affordable: 1.15, Rental Assistance: 1.11
• Non-recourse
• Commercial Space: 25% of net rentable area and 25% of effective gross income
• Assumable with a .50% fee
• Qualified Properties:  Qualified Properties:  5 Units or More.
• Repairs: Cannot exceed the greater of $15,000 per unit
• Occupancy: Minimum of 90% for 90 Days
• Age Restricted Properties of 62 or older allowed
   

MULTIFAMILY NEW CONSTRUCTION LOAN - HUD FHA 221 (d)(4): This assumable non-recourse loan can also be used for substantial rehabilitation. The construction and perm loan are all in one. Up to 85 of cost, Maximum term and amortization 40 years.

• Minimum Loan: $3,000,000   Maximum Loan:  None
• Loan to Cost:  Up to 85% with no Loan to Appraised Value required. 87% of replacement cost for Affordable, 90% of replacement cost for projects with 90% or greater rental assistance  
• Very Low Rates fixed for 40 years. .65% Mortgage Insurance Premium required
• Term: 40 years, Non-recourse
• Minimum DSCR: Market Rents: 1.20, Affordable: 1.15, rental Assistance: 1.11
• Assumable with a .50% fee
• Non-recourse
• Age Restricted Properties of 62 or older allowed
   

MULTIFAMILY STREAMLINE REFINANCE  -  HUD FHA 223 (a) (7): Only for existing HUD apartment loans and Healthcare loans. This loan can close fast (60 days), requires no appraisal and has very low loan expenses and the best bonus - The purpose of this loan is to lower your loan payments at times when interest rates are lower. Maximum loan amount is the original mortgage, or existing HUD loan balance plus repairs and loan expenses. There is no LTV - loan to value constraint.

• Loan Amount:  Lesser of: A) Original principal amount of current HUD mortgage or (B) Current principal balance plus loan expenses, closing costs and prepayment penalty costs - plus the cost of deferred maintenance repairs or improvements.
• Term: Not to exceed the original term, or up to 12 years beyond the remaining term of the current HUD loan. Remaining economic life of the property will be considered.
• Interest Rate fixed for entire term
• Amortization is the same as the loan term
• Minimum DSCR: 1.11 to 1.20
• LTV: No loan to value constraint
• Non-recourse
• Cash Out: Not allowed
• Third Party Reports: No Appraisal,  usuallly no environmental report, no property condition report (PCNA) needed unless one has not been completed in the last 10 years.
• Assumable with a .50% fee
• Reduced Loan Fees and Expenses
• Time for funding: 60 days

Need help calculating your DSCR? Try our free Debt Service Coverage Ratio Calculator here.

Want to learn more about DCSR and why it is the Number One Factor in analyzing the risk level of your business or investment property loan? Read our current article here! 

 

ARE YOU A GOOD MATCH FOR A HUD APARTMENT LOAN?

Answer These Questions and Find out Fast

 

To Score Add Up All Yes Answers

Do you have current or recent Multifamily (5 Units or more) ownership experience?

YES          NO

Do you have at least 15% of the cost or value of the project in equity or cash, or can bring in a partner that can help you achieve this?

YES          NO

Do you have a Credit Score of 660 or above? 

YES          NO

It it correct that you have no tax liens?

YES          NO

Is it correct that you have never defaulted on a Federal loan guaranteed by HUD?

YES          NO

Do you currently have some post closing cash (cash left over after the loan closes) or can you bring in a partner to help you achieve this?

YES          NO

Are you a US Citizen or Resident Alien?

YES          NO

Are you willing to hire a HUD experienced property management company if you do not have prior HUD property management experience?

YES          NO

Have you run the numbers with income and expenses to show that the property is running profitably?

YES         NO

Will the subject property have 25% or less Commercial Space?

YES         NO

Does your project have the time and are you willing to wait for a HUD Apartment Loan Closing?  This will take 6 – 7 months for a refinance or purchase, 8 – 9 months for a construction project

YES         NO

Do market rents in the submarket of the subject property support the rents that you have or are planning on having for the subject property?

YES        NO

Are you willing to own the property in a single asset entity like an LLC (Limited Liability Company)?

YES       NO

Will a long term, low rate 35– 40 year fixed rate mortgage that is assumable be your preference?

YES       NO

Are you willing to go through a lengthy and complicated loan application process to obtain the best quality long term fixed rate mortgage available in America?

YES       NO

Are you willing to keep the subject property in excellent condition during the entire time you have the HUD mortgage?

YES       NO

Are you ok with a HUD requirement requiring replacement reserves?  This is  an additional  amount paid into a repair/capital replacement escrow account with your mortgage payment each month.  This account will be used for repairs and major replacements to the property such as replacing a hot water heater, or roofing, etc..

YES       NO

Are you ok with the HUD requirement for annual audited financial statements on the property?

YES      NO

Are you ok with HUD making annual inspections of the subject property?

YES      NO

Are you ok with HUD restrictions on cash distributions to owners?

YES      NO

 

Are you a good match for a HUD Apartment Loan? 

If you answered YES 18 times or more    =     EXCELENT MATCH

If you answered YES 16 times or more    =      GOOD MATCH

If you answered YES 14 times or more   =       FAIR MATCH

If you answered YES less than 14 times  =       POOR MATCH

If you have 14 or more YES answers call one of our friendly loan specialists to size and pre-qualify you for a HUD Apartment Loan and to find out more about the program:  503-376-7303