- FHA loans offer some of the most generous terms of any commercial real estate loans. Their high allowed leverages, low interest rates and long available terms make HUD/FHA loans attractive to investors who are purchasing, building or renovating qualifying multifamily properties. Few other loan programs match what HUD and the FHA offer.
Advantages of FHA/HUD Loans
- FHA Guarantee: The defining and most significant feature of HUD/FHA multifamily loans is the FHA’s guarantee. The guarantee allows lenders to relax their typical requirements, which results in more generous commercial loan terms for most programs.
- Leverage: The relaxed requirements allow investors to maximize their leverage. Many HUD/FHA loan programs allow loan-to-value ratios above 80%, and sometimes as high as 90%. The range is much higher than the typical 65-80% that conventional multifamily loans commonly allow.
- Amortization: HUD/FHA loan durations last anywhere from a few years to decades, depending on the specific program. Many programs (including even shorter ones) have amortization schedules that go out ~30 years, though.
- Size: HUD/FHA loans can range in value from a few hundred thousand up to millions. Several loan programs offer more than $10 million (sometimes much more) in financing.
- Interest Rate: The guarantee and longer amortization schedules allow lenders to extend somewhat lower interest rates. A loan’s exact interest rate depends on the program, borrower’s credit, property, and current market conditions. Most loans offer below-market rates when compared to comparable conventional loans.
- Non-Recourse: HUD/FHA loans are usually non-recourse (with standard carve-outs). This means investors themselves can’t be held responsible for the balance remaining on a loan.
Disadvantages of FHA/HUD Loans
- Qualification: Only qualifying multifamily properties can be financed with HUD/FHA loans. While many different types of multifamily properties qualify (e.g. apartment, senior, student, medical multifamily properties), programs normally require that properties provide affordable housing. Using an FHA Multifamily Accelerated Processing (MAP) Lender can minimize the extra time required, but some extra time typically still is needed.
- Approval: Because loan applications for these programs must be approved by the FHA, underwriting takes longer than it does for conventional commercial real estate loans. This may be a consideration if trying to close on a property or start a renovation quickly.
- Prepayment: Most FHA loan programs come with prepayment penalties that discourage paying the loans off in the first few years (up to the first 10 years).
What is HUD?
The Department of Housing and Urban Development is tasked with promoting fair and equal housing, and it primarily does so through agencies that the department oversees.
Among other work, the department provides loans for low-income housing through its agencies. These include both loans for low-income homebuyers, and commercial loans for affordable housing projects.
Except for a specialized loan program that serves Native Americans, HUD itself doesn’t directly guarantee loans. Instead, it offers guaranteed loans through agencies such as the FHA. The vast majority of HUD’s affordable housing loans are processed and approved by the FHA.
(Although affordable multifamily housing loans are technically procured through the FHA, the terms “HUD loans” and “FHA loans” are often used interchangeably in non-technical conversations.)
What is the FHA?
The Federal Housing Administration is broadly overseen by HUD, but specific loan applications are solely approved by the FHA.
For approved loans, the FHA provides mortgage insurance that serves as a guarantee. In the event of nonpayment, the administration will cover the lender’s losses and remainder of the loan.
Many lenders are willing to loosen their lending requirements for FHA loans, because the loans are guaranteed even if the borrower defaults. The looser requirements are especially helpful when underwriting loans for low-income homebuyers and low-income affordable housing properties.
What Are FHA Loans?
The FHA offers many commercial loan programs for multifamily housing, and many affordable housing properties can qualify for at least one program.
Each FHA loan program has its own particular requirements, but most programs generally require that properties provide affordable housing for low- and moderate-income individuals/families.
Properties can be a variety of different types, including apartments, senior housing, student housing, assisted living housing, and select other multifamily properties. Multifamily is defined for commercial purposes as having more than four units, and not having the owner reside on the property.
Types of FHA Loans
As mentioned, the FHA offers many different loan programs. Here are some of the most common FHA loans that commercial real estate investors use.
HUD/FHA 223(f) loans offer long-term, fixed-rate financing for non-new multifamily properties.
Qualifying properties must be a minimum of 3 years old (new construction doesn’t qualify), and there can’t have been any major renovations in the past 3 years. Additionally, the average occupancy rate must be at least 85%, and commercial space can’t account for more than 20% of gross revenues or 25% of square footage.
For qualifying properties, the long duration and fixed interest rate that FHA 223(f) financing offers makes these loans well-suited for being a primary mortgage.
HUD/FHA 223(a)(7) loans are exclusively used to refinance existing debt on multifamily properties.
Qualifying properties must already be financed through a HUD/FHA loan program, and the FHA must again approve the property holder for financing. Other than these basic requirements, there are few other major requirements that must be met.
Investors often use FHA 223(a)(f) loans to improve a property’s cash flow. These loans might have a lower interest rate if the current market rates are more favorable than when the initial loan was taken out. The program also offers extended amortization schedules that reduce monthly payments.
Alternatively, FHA 223(a)(f) loans can be used to avoid prepayment penalties on other FHA loans. When an existing FHA loan is refinanced through the 223(a)(f) lending program, the initial loan is paid off but any penalty is waived.
The application process for 223(a)(f) loans is simple, as there’s no need to obtain an appraisal, environment report or market study. An application fee of 0.3% is due at the time of application, but half is refunded at closing.
HUD/FHA 221(d)(4) loans offer some of the lowest costs of any commercial real estate loans.
The terms for FHA 221(d)(4) include a fixed interest rate, 40-year amortization schedule, 3-year interest-only introductory period (for construction), and maximum 90% LTV. These terms allow investors to keep monthly costs as low as possible, and to spread out almost all of a purchase price over four decades. Both greatly ease cash flow.
Because of the introductory interest-only period, 221(d)(4) financing is particularly well-suited for new construction of multifamily properties. The fixed rate and long amortization are ideal for a primary mortgage on a new property.
HUD/FHA 241(a) loans offer supplemental financing that can assist with major improvements to properties.
241(a) financing can be used to install needed safety features, energy-efficient infrastructure or similar improvements. Improvements often don’t qualify if they’re solely to raise the value or rents of a property, but other improvements that focus on safety, energy efficiency and similar aspects can qualify.
In select cases, FHA 241(a) loans can be used to expand a property. A loan might help cover the cost of additional land on a new construction property, or a loan might help finance hard and/or soft construction costs when expanding an existing property.
HUD/FHA 232 loans and HUD/FHA 223(a)(7) loans are used to finance senior housing and assisted living properties.
FHA 232 financing can be used for new construction or “substantial rehabilitation” of qualifying senior or assisted living properties. Substantial rehabilitation is defined as rehab projects that either exceed 15% of a property’s value, or require replacing at least two major building components.
FHA 223(a)(7) financing is mainly used to refinance senior and assisted living properties. The loan program can refinance FHA 232 loans, or other loans that are the primary mortgage.
HUD/FHA 242 loans provide uniquely specialized financing for hospitals and similar healthcare facilities. Compared to other FHA loans, the 242 loan program is an outlier but important.
FHA 242 financing can be used by hospitals for capital projects, acquisitions, renovations, equipment purchases and refinancings. The loans provide low interest rates and flexible requirements, provided they’re restricted to healthcare facilities (and not assisted living facilities). Rural hospitals, urban medical centers, university hospitals and other facilities can get these loans.
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