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5 Myths About FHA-Insured Multifamily Loans
HUD multifamily loans are often the most competitive options available — yet many misconceptions persist about these financing packages. Let’s break down the five most common myths.
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.
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 FHA nor HUD 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.
What are the benefits of FHA-insured multifamily loans?
FHA-insured multifamily loans offer a variety of benefits, including higher leverage and lower DSCR requirements for properties with affordable housing components, better terms than virtually any other construction loan, acquisition financing, and refinancing options, and the ability to take advantage of falling interest rates and cover refinancing costs and minor or moderate repairs. Additionally, HUD loans are fully assumable, which 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.
For more information, see:
What are the requirements for FHA-insured multifamily loans?
HUD/FHA Multifamily Loans require longer than many other loan types to be approved and may require significant documentation. Investors/borrowers likely need one or more professional advisors to guide them through the entire process.
FHA Loans are 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. 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.
For more information on wage requirements and HUD projects, please see How Do Wage Requirements Impact HUD Projects?
What are the advantages of FHA-insured multifamily loans compared to other loan types?
FHA-insured multifamily loans offer some of the best terms out there. They generally have no more or less flexibility than any other type of multifamily financing, and there are several major HUD-insured multifamily loans, each with a different purpose in mind and a different borrower profile. For example, a HUD 221(d)(4) loan can give you better terms than virtually any other construction loan, and the FHA 223(f) loan is probably your best bet for acquisition financing or refinancing. Additionally, the FHA's 223(a)(7) loan can close in around 60 days and is expressly created for refinancing, and HUD loans are fully assumable. This 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.
What are the disadvantages of FHA-insured multifamily loans?
FHA-insured multifamily loans have several disadvantages. They are not advantageous for borrowers seeking small balance loans, as fixed origination costs translate to higher costs. Additionally, if your need for financing is time sensitive, an FHA-insured multifamily loan may not be the best fit. In general, HUD-insured multifamily loans also do not fit the needs of merchant builders.
What are the eligibility criteria for FHA-insured multifamily loans?
To qualify for FHA-insured multifamily loans, borrowers must typically meet certain qualifications, including those related to the property type, occupancy, and borrower experience. The property must be a market-rate property, and the borrower must have experience in the real estate industry. Additionally, the occupancy of the property must be at least 51% residential and no more than 49% commercial. For more information, please see this article and this guide.
What are the risks associated with FHA-insured multifamily loans?
FHA-insured multifamily loans come with a few risks. The most significant risk is that the loan may not be approved due to the stringent requirements of the FHA. Additionally, the loan may be more expensive than other loan products due to the fixed origination costs associated with FHA-insured loans. Lastly, the loan process may take longer than other loan products due to the additional paperwork and red tape associated with FHA-insured loans.