What is the appeal of HUD loans?
HUD multifamily loans are pretty popular because they offer highly favorable terms. For example, a borrower may be able to refinance a stabilized asset under the 223(f) program of the HUD and enjoy a long 35-year term of up to 80% LTV at an all-in fixed rate that can go as low as 3.75% (as of 2017). A borrower can also use the 221(d)(4) program of the HUD for construction or substantial rehabs to enjoy a generous 85% LTV with the term of 40 years and amortizations secured at 4.5%.
Investors often see HUD multifamily loans as appealing options because while they are technically classified as long-term and permanent debt, it’s possible to pay them off at any time with a simple prepayment penalty (which is also tax-deductible). The property can likewise fully assumed by a new owner with a simple one-time fee of 0.05%.
Should the owner decide to sell the multifamily property, later on, the buyer can choose to either pay the loan off or assume the existing loan at below-market interest rates. This makes multifamily properties with HUD loans easier to sell.
Are HUD loans reserved for affordable housing?
Not at all. This is one of the biggest misconceptions about this lending program because most people only hear of HUD’s Section 8 program for affordable housing.
But there is a vast difference between HUD properties that are government-owned and operated to provide cheap housing and properties that take advantage of HUD loans. Many market-rate, Class-A multifamily buildings across the US can potentially qualify for HUD loans. You may also combine HUD with municipal grants and local tax credits to create compelling investment scenarios.
Does HUD offer construction loans?
Yes. HUD provides the 221(d)(4) construction loan for multifamily at affordable market-rate housing for multifamily developers. This non-recourse program can provide borrowers with 85% loan to cost and a 40-year term at a fixed rate. Because these terms don’t change even when market conditions change (unlike conventional bank financing), the program is particularly attractive in uncertain economic environments.
How long does it take to get approved for a HUD loan?
This is perhaps the only downside of this government-backed mortgage loan option. Borrowers need a lot of patience if they want to take advantage of HUD programs. The general timeframe is anywhere from 5 to 9 months. Construction loans usually take the longest.
You might be wondering why it takes such a long time to get the funding. That’s because both the HUD and the FHA lender are underwriting the transaction. If you cannot wait six months and need to buy the property right away, it makes sense to explore bridge-to-HUD financing to facilitate the acquisition. This way, you can get the funding you need to snap up a good deal while you wait for your HUD to be approved.
Is the HUD lending program subject to the whims of whoever is in the White House?
Not likely. The HUD and many of its loan programs have been around for over 50 years and generally don’t see any significant changes even new administrations take over. Several federal government cutbacks have made no significant pullbacks to the HUD loan insurance program for private developers thus far.
How will I know if I’m eligible to apply for a HUD loan?
Unfortunately, you can’t just walk into a HUD regional office and apply for a multifamily loan program. Prospective borrowers are required to work with FHA licensed lenders.
A licensed lender can provide your expertise and assistance throughout the entire loan application and closing process. They will interface with the HUD on your behalf. They can also offer underwriting analysis to help you determine whether a HUD loan will indeed be the best fit for you as a borrower and for your multifamily project.
Can I use a HUD loan to finance a commercial property?
This is a question that many commercial property investors want to know the answer to. Is it even possible to apply for a HUD loan for a commercial multifamily property?
There is no one concrete answer. It depends on the appraiser’s decision. How “residential” is it? What is the amount of non-residential usage relative to the total floor space of the property?
Mixed-use properties may become suitable for HUD mortgages if (1) they are intended to be the primary residence of the borrower and (2) they meet specific standards set by the FHA.
For example, it may be possible for a borrower interested in having both a home and a commercial office space or a storefront to buy a property in an area that is zoned as mixed-use commercial/residential. The final decision will be affected by building codes, state and local ordinances, and other regulations.
The critical thing to remember is that HUD and FHA home loans are primarily intended for “owner-occupiers.” This means that anyone interested in purchasing a mixed-use building with a HUD or FHA mortgage must occupy the building as their primary residence.
Of the property’s total floor space, no more than 49% can be used for non-residential purposes.
In essence, any property purchased with a HUD mortgage should serve as a primary residence first and foremost; the non-residential usage of the building should be subordinate to its residential qualities.
The appraiser’s judgment of the building is the most important part of HUD loan approval for commercial properties. Each application is assessed on a case-to-case basis when determining its suitability for a HUD mortgage. It’s essential to consult a loan officer to get a clear idea of what properties were traditionally approved for HUD loans in the market you are interested in investing.
Do some research
When dealing with commercial loan scenarios, that call is vital to gather information on multiple products so you can eventually lock in the best terms and interest rates. Don’t leave any stone unturned. Talk to a HUD loan specialist as well as other commercial mortgage financing experts to understand your options. It’s also a good idea to ask about bridge-to-HUD loans early on if your project is time-sensitive and you cannot afford to wait months to get HUD’s approval.