Beginner’s Guide to HUD Multi-Family Loans

Tim Milazzo
March 24, 2017
4
min

Guest-collaborated blog with Dwight Capital

What is HUD?

HUD stands for “Housing and Urban Development”, which is the US federal government agency that administers the Federal Housing Administration (FHA) multifamily mortgage insurance. As it relates to the multifamily loan program, HUD and FHA are often used interchangeably in referencing these programs that are 100% insured by the government in the event there is a default on the property.

Why get a HUD loan?

HUD loans provide extremely favorable terms. Refinancing a stabilized asset would fall under HUD’s 223(f) program, which provides a 35-year term and amortization, non-recourse loan at up to 80% loan to value, at a fixed all-in rate as low as 3.75% (as of Q1 2017). On a construction or substantial rehab deal, the 221(d)(4) program provides even more generous terms at 85% loan to cost (non-recourse) with a 40-year term and amortization that can be secured at 4.50%.

Generally, the only change in terms with HUD would be fluctuations of interest rates at the time of rate lock. A HUD loan really provides the greatest appeal for sponsors because it is a long term permanent debt option, but can be readily paid off at any time with a simple tax deductible prepayment penalty, or fully assumed by a new property owner after a simple 0.05%, one-time fee. These features can lead to a premium price in the event of a sale, as the buyer has the option to either pay off the loan or assume the existing debt with a below market interest rate.

Isn’t HUD only for affordable housing?

No! This is the biggest misconception about the HUD lending program, as generally everyone assumes that HUD is only applicable for Section 8 and affordable housing. However, there is a very big difference between a HUD property, which is owned and operated by the government to provide affordable housing, and a property that takes advantage of the HUD loan. Many Class A, market-rate Multi-family properties across the country can qualify for a HUD loan. HUD loans can also be combined with local tax credits or municipal grants to create a compelling investment scenario.

Does HUD provide construction loans?

Yes! For multifamily developments, HUD has the 221(d)(4) construction loan program for developers of both market rate and affordable housing. This program is non-recourse and provides borrowers with up to 85% loan to cost, with a 40-year term and amortization at a fixed rate. Unlike conventional bank financing, these terms are not subject to change along with market conditions which has made the 221(d)(4) particularly attractive in today’s economic environment.

How long is the typical process to secure a HUD loan?

Arranging a HUD loan takes a bit of patience, which is generally the biggest drawback for using the program. While the processing time depends on whether the property is stabilized (program 223(f)) or construction (program 221(d)(4)), it generally takes 5–9 months from engagement to closing, with construction being the longer of the two. This longer lead time occurs because the FHA lender and HUD each underwrite the transaction. However, bridge-to-HUD financing may be available to facilitate acquisition financing when waiting 6 months is not a viable option to secure the permanent debt.

Will the HUD lending program stick around under the new administration?

Even with federal government cutbacks being seen out of the Trump administration, there has been no pullback in the HUD loan insurance program available for private developers. As we are only a few months into the new administration, a wait and see approach is prudent, but HUD has been around for 50 years and don’t foresee any major changes from the administration.

How do I find out if I’m eligible for a HUD loan?

As a prospective HUD borrower, unfortunately you are not able to just walk into one of the regional offices to apply for one of their loan programs. HUD requires you to work with an FHA licensed lender, such as Dwight Capital. As one of the leading FHA lenders in the industry, Dwight is able to provide expertise throughout the HUD closing process, interfacing with HUD directly on your behalf, and providing expert support. Through their underwriting analysis as well as a close relationship with the HUD agency, they would be able to provide the best indication of whether HUD will be a fit for you and your project.

Dwight Capital is one great Multi-family lender available through StackSource. As with any commercial loan scenario, gathering multiple loan options is your best bet to locking in your best loan. For Multi-family, you should leave no stone unturned — use StackSource today to connect with loan options from HUD, Fannie Mae and Freddie Mac, Banks, and Private Lenders who will all compete to provide your loan. Connecting with top lenders on StackSource is the easiest, free path to finding your next Multi-family loan.

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Our expert Capital Advisors help you secure your ideal capital stack, resulting in a lower cost of capital for your investments in less time and with more transparency than a traditional commercial mortgage brokerage. Learn more at StackSource.com.