- The FHA 241(a) loan program is a type of mortgage loan aimed at providing borrowers with the finances they need to fund repairs, additions to the structure, or significant improvements.
- The FHA/HUD 241(a) is only available for multifamily rental housing as well as health care facilities. These properties must have an FHA insured first mortgage on them, or they must have a HUD-held mortgage.
FHA 241(a) Loan Highlights
Loan Term: The loan runs co-terminus alongside the existing HUD first mortgage.
Interest rate structure: The FHA 241(a) offers only a fixed interest rate.
Maximum loan amount: This is dependent on several factors. The maximum among borrowed is the lesser of either 90 percent loan to cost, 90 percent loan to value, or 1.11 debt service coverage ratio (this involves the combination of both the first and second loans).
Amortization: These are fully amortizing loans.
Property type: The FHA 241(a) is available on apartment style or other multifamily properties as well as some health care facilities, though the properties must have a HUD-insured first mortgage currently in place.
Borrower eligibility: Borrowers must be single asset entities though non-profit entities are also eligible.
Assumable: These loans are assumable with HUD and lender approval as well as with a fee for the assumption paid upfront.
Prepayment of loan: It is available at 10 percent in year one and then at a rate of 1 percent declining per year, though there may be other options available dependent on market conditions.
Recourse: These loans are non-recourse loans, though HUD regulatory agreements are required
One key area to consider is HUD mortgage insurance premiums. These may apply at the following levels for multifamily properties:
Market rate properties: 0.95%
Affordable properties: 0.35%
Energy Efficient Properties and Broadly Affordable: 0.25%
If using these for residential health care facilities, with LIHTC, the rate of 0.45 percent and without LIHTC, it is 0.72 percent. For hospitals, the mortgage insurance premium is 0.65 percent.
Advantages of FHA 241(a) Loans
- DSCR Requirements: The DSCR requirements are generous, offering loans that allow borrowers to access them at a minimum of 1.11 times the DSCR, which could open the door for easier borrowing for some.
- Interest Rates: These loans are fixed rate mortgages, meaning their payment structure will not change throughout the duration of the loan, making planning for costs easier for most borrowers.
- Assumable: The loans are also fully assumable as long as there is FHA approval of the new borrower, which is dependent on multiple factors.
- Non-Recourse: These loans are also non-recourse loans, which provide benefits to the borrower as it limits the developer and investor liabilities related to the loan.
Disadvantages of FHA 241(a) Loans
- Insurance Premiums: There are mortgage insurance premiums required for most loans, which can add to the cost, sometimes significantly depending on the type of property they are used on.
- Application Fee: There is also a 0.30 percent FHA application fee which is based on the entire value of the loan borrowed that must be paid upfront.
- Inspection Fee: There is also a required FHA inspection fee, which is 0.50 percent of the loan amount, and that is a requirement that must be paid upfront as well.
- Third-Party Costs: There are also a number of third-party reports that the developer must provide to obtain this loan, which can cost a significant amount of money to complete in some situations.
What is the FHA 241(a) loan program?
The FHA 241(a) is a type of second mortgage that property owners can take out to handle upgrades to their structure. This often includes handling repairs as well as home improvements that are large in scale. To qualify, borrowers must already have a HUD-insured first mortgage in place.
There are many acceptable types of repairs and upgrades that are often allowable. For example, some property owners may wish to choose this method to increase the energy efficiency of the infrastructure of their property. Others may use it to improve the safety of their property in some way. It is possible to use these loans to cover the costs of financing hard or soft construction expenses that are necessary to build out the property by adding to its footprint. Making it a larger existing structure is one way some property owners could benefit from the FHA 241(a) loan program.
What third-party reports are necessary for the FHA 241(a)?
Borrowers will likely need to complete several third party reports in order to obtain access to the FHA 241(a). These make up a significant amount of the cost associated with the loans. They may include seismic reports in some areas, environmental assessments (most common in all areas), market studies, Full HUD and FHA appraisal reports, as well as architectural and engineering reports for the proposed projects.
How long does it take to get approval for HUD 241(a) loans?
Though timing can differ between lenders and for various reasons, it is possible to close on these loans within 20 weeks. This allows for about eight weeks of time for all of the pre-application processes to be completed. There is often about another eight weeks for the application process to be completed. There are then a few more weeks before the closing of the loan typically takes place. Some projects can be a bit longer, depending on the project itself.
Is there a new to pay to finance per permanent placement fees?
Yes, most of the time, these loans require borrowers to pay a financing or permanent placement fee. This fee is typically paid at closing. Though there are several possible differences, most of the time, this comes out to 3.5 percent of the total borrowed amount.