Multifamily Property Owners Should Consider HUD-Insured Loans

Interest in Housing and Urban Development (HUD) insured loan programs has increased in recent years as real estate investors become savvier to potential options for financing. For those holding multifamily assets long-term, a HUD-insured loan — provided by qualified lenders — may be a valuable option to consider.

Here are some of the potential benefits.

Flexibility of financing

A common misconception of HUD 223(f) loans is that they are only for nonprofit and affordable housing projects. While it’s true that HUD deals primarily with low-income housing, many unrestricted market-rate multifamily projects also have been financed under this program.

These programs were created to provide capital for the acquisition, rehabilitation, development, and refinancing of affordable properties — including multifamily apartment projects. Work with a qualified lender to find out if you qualify for one of the industry’s most affordable financing options.

Longer loan term and amortization

HUD-insured loans typically offer the longest terms in the industry. In addition, all FHA loans are fully amortizing, typically creating the longest amortizations in the industry and more flexibility on debt service coverage ratios. Longer amortization periods may ultimately result in lower monthly payments, and therefore more cash flow for your organization.

Fixed terms all but eliminate interest rate risk, such as the need to make balloon payments at the end of the loan. The 223(f) loan offers a fixed-rate term up to 35 years — subject to such term not exceeding 75% of the project’s remaining economic life as determined by an appraisal. HUD 221(d)(4) provides one of the very few fixed-rate new construction loans in the multifamily development business, with a fixed rate of up to 40 years.

Generally, a longer period of fixed rate results in a higher interest rate. However, since they are government insured, FHA and HUD multifamily loans earn a AAA credit rating. This leads to rates lower than Fannie Mae and Freddie Mac’s 10-year fixed-rate loans.

Additional benefits

A few additional incentives to these loans include:

• Higher leveraging — This typically comes to 85% loan-to-value (LTV) for market rate properties, 87% LTV for affordable properties, and 90% LTV for properties using rental assistance.
• Non-recourse — HUD guarantees these loans.
• Fully assumable — This gives flexibility upon sale, though a fee is typically charged for full ownership transfer transactions.
• No yield maintenance — You always know what your prepayment penalty is.
• Interest rate reduction capability — As rates dip, this allows you to go to the lender and get your rate lowered. The payment is lowered and the amortization stays the same.

How we can help

Every project has its own set of challenges, which means each project demands a customized approach. Our professionals can provide a broad spectrum of services across a variety of affordable housing entities to help you uncover opportunities.

If you’d like to hear more about these types of loan programs, reach out to CLA’s real estate team.