The Department of Housing and Urban Development insures some of the most competitive multifamily loans available to investors and developers. It’s hard for most lenders to compete with 35-year (or longer) fully amortizing loan terms, not to mention low, fixed interest rates, and minimal debt service coverage ratio requirements blended with some of the highest leverage available in the industry.

Due to several persistent myths about loans affiliated with the department, many investors in the multifamily space unfortunately never even consider a HUD-backed loan as an option.

Are HUD loans perfect? Well, no — they aren’t. FHA-backed financing isn’t going to be the best solution for absolutely everyone. However, it’s worth debunking some of the most common myths so that you, as a potential borrower, understand what these competitive financing options can do for your next acquisition, development, or refinance.

1. FHA Loans Are Only for Affordable Housing

The most common misconception of HUD debt is that it’s only for affordable housing or subsidized housing communities — think Section 8 properties and the like. The reality couldn’t be further from the truth. FHA financing is available for nearly any market-rate property, provided it meets all eligibility criteria. Even if your community doesn’t have a single affordable housing unit inside, that won’t disqualify you.

SEE ALSO: How Do Wage Requirements Impact HUD Projects?

Where does this myth come from? It almost certainly stems from the FHA’s single-family home mortgage loan program, which is geared toward low- and middle-income families. And, for investors or developers who own or are building properties with affordable housing components, an FHA multifamily loan does offer some advantages — like higher leverage and lower DSCR requirements. Even without those additional perks, though, an FHA multifamily loan offers some of the best terms out there.

2. The FHA Acts as a Lender

This one’s easy to debunk. Neither the Federal Housing Administration nor the Department of Housing and Urban Development directly lend money to any borrowers. That’s as true for an FHA multifamily loan as it is for a home loan. Similar to agency loans — think Freddie Mac and Fannie Mae financing packages — private lenders provide financing. HUD’s role is to insure the loans. 

What does that mean? When a borrower applies for HUD financing, they submit an application through a multifamily accelerated processing (or MAP, for short) lender. The FHA then underwrites the loan to see if it meets the department’s risk profile. If it does, the mortgage is generally approved — with HUD only on the hook in the case of a borrower default. To that end, HUD collects a regular mortgage insurance premium from every borrower to offset the risk of its insured portfolio of loans.

3. HUD Loans Have Impossibly Long Timelines

This one’s a little more complicated. There’s absolutely some truth to this: HUD loans do have some of the longest times out there from application to close, even if it does vary by FHA loan product. Some types of loans may close in a matter of a couple months, and some may take closer to a year to finalize. 

But hold on a second — don’t let that put you off, even if you needed that financing yesterday. The myth to unravel here is more related to the “impossibly” part. Yes, HUD loans can take a long time to approve, but that doesn’t mean you can’t utilize them in transactions where timing is crucial. That’s where other types of financing can support you.

Overcoming Timing Obstacles

Consider the emergence of the bridge-to-HUD financing option. Bridge-to-HUD loans marry the best parts of bridge loans with the best from HUD. The borrower takes a short-term bridge loan to get swift access to the capital it needs, then refinances the (typically more expensive) bridge financing into the highly advantageous terms HUD loans offer once it’s approved. The result may be a more expensive loan for a few months, but HUD’s long, fully amortizing terms will more than make up the difference.

And if the timing isn’t the most critical part of your financing plan, consider that a HUD 223(f) loan — generally used for buying or refinancing multifamily properties — takes around four months to close. That’s only about 60 days longer than most Fannie Mae or Freddie Mac loans take to close, and terms are better across the board.

4. FHA Financing Means Less Flexibility

FHA multifamily loans generally have no more or less flexibility than any other type of multifamily financing. Further, there are several major HUD-insured multifamily loans, each with a different purpose in mind and a different borrower profile. Looking to develop a market-rate or affordable property? A HUD 221(d)(4) loan can give you better terms than virtually any other construction loan. Need acquisition financing, or want to refinance? The FHA 223(f) loan is probably your best bet.

And once you’ve secured your fixed-rate, non-recourse debt through HUD, refinancing it is far simpler than the initial loan application. The FHA’s 223(a)(7) loan, expressly created for this purpose, can close in around 60 days. Not a bad wait time to take advantage of falling interest rates, and the loan can cover your refinancing costs and even the costs of minor or moderate repairs that you may need to implement at your community.

Finally, HUD loans are fully assumable. That can be an amazing incentive for a would-be buyer of an apartment community looking to take advantage of an existing loan's lower, fixed interest rates — especially if rates are otherwise climbing.

5. HUD Loans Tie Up Surplus Cash

It’s true that FHA loans used to only permit a maximum of two surplus cash distributions per year. And that’s still true for loans closed before Sep. 7, 2022. However, HUD issued a new mortgagee letter that allows many of its insured loans to provide monthly surplus cash distributions.

Keep in mind that this doesn’t include all loans, though. Properties with HUD financing which are newly developed or recently acquired can’t take advantage of monthly distributions. The same goes for communities which utilize Section 8 project-based rental assistance, or housing choice voucher programs.