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Understanding the Difference Between Fannie Mae and HUD Multifamily Loans
HUD and Fannie Mae loans are two of the strongest and most popular financing options out there for multifamily real estate. What's the difference between them?
When it comes to securing financing for a multifamily property, there are a number of different options available to borrowers. Two of the most popular options are HUD multifamily loans and Fannie Mae multifamily loans.
While both types of loans can provide borrowers with the non-recourse financing they need to purchase or refinance a multifamily property, there are some key differences between the two.
What Is a HUD Multifamily Loan?
A HUD multifamily loan is a loan that is insured by the Federal Housing Administration, or FHA, and is available for the purchase, refinancing, or development of multifamily properties. HUD multifamily loans are available through a number of different lenders, and these loans may be used for a wide range of properties, from affordable housing to market-rate communities.
What Is a Fannie Mae Multifamily Loan?
A Fannie Mae multifamily loan is a loan that is backed by the Federal National Mortgage Association, or FNMA. These loans may be used for acquiring, refinancing, or construction of apartments, are provided by approved lenders and insured by Fannie Mae. There are many, many different types of Fannie loans, each with their own advantages and disadvantages.
Key Differences Between HUD and Fannie Mae Multifamily Loans
While HUD and Fannie Mae multifamily loans both offer financing for the purchase or refinancing of multifamily properties, there are some key differences between the two.
There are, broadly speaking, no maximum loan amounts for HUD or Fannie Mae multifamily loans. There are some key differences for loan minimums, however. HUD loans tend to start at $4 million (with typical loan amounts starting at $10 million), while Fannie Mae loans can go much, much lower. Fannie’s Multifamily Small Loan program, for example, starts at just $750,000.
Fannie Mae offers both fixed- and variable-interest financing, and even loans that transition from floating to fixed at the borrower’s discretion. On the other side of things, all loans backed by HUD are locked in at a fixed rate for the life of the loan.
In a rising rate environment, it may therefore be preferable to go with a HUD loan. However, if rates are anticipated to decrease, a variable-to-fixed or floating-rate loan from Fannie could be more advantageous.
Loans from HUD have among the longest terms in the multifamily sector. For HUD 221(d)(4) construction financing, for example, you can receive loan terms of up to 43 years. That’s not to say Fannie Mae’s offerings are bad, though — their loans can range between five and 30 years, broadly speaking.
HUD has a clear advantage here, as all of its multifamily financing is fully amortizing, while many of Fannie Mae’s loans are partially amortizing. In the case of the latter, this means a borrower must be prepared to handle a larger balloon payment at the end of a loan’s term.
Fannie Mae loans close much, much faster than HUD loans. The typical Fannie loan takes between 45 and 60 days. By comparison, HUD loans can take between six and eight months, though financing for properties with affordable components can close significantly faster.
While there are ways of getting funding around HUD’s lengthy timelines, like through a bridge-to-HUD loan, Fannie Mae financing clearly has the upper hand here.
So: Is Fannie or HUD Best for You?
As you have seen, there are significant differences between HUD and Fannie Mae multifamily loans. Loans backed by the Department of Housing and Urban Development offer some of the best competitive financing out there, with fully amortizing, long terms the norm — but the wait to get the financing can be much longer than most investors are comfortable with.
Fannie Mae, on the other hand, offers competitive loans at a much faster pace. While they may fall short of HUD’s fully amortizing loans, their interest rates are broadly similar and they generally close in less than two months.
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What is the difference between Fannie Mae and HUD multifamily loans?
The main difference between Fannie Mae and HUD multifamily loans is that HUD multifamily loans are insured by the Federal Housing Administration (FHA), while Fannie Mae multifamily loans are not. HUD multifamily loans are available through a number of different lenders, and may be used for a wide range of properties, from affordable housing to market-rate communities. Fannie Mae multifamily loans, on the other hand, are available through Fannie Mae-approved lenders and are typically used for the purchase or refinancing of multifamily properties.
What are the advantages of Fannie Mae multifamily loans?
Fannie Mae multifamily loans offer a variety of advantages, including very competitive interest rates, up to 80% LTV allowance, streamlined processing/documentation, capital improvements may be included in the loan amount, most loans are non-recourse, supplemental loans are allowed after 12 months, 30-180 day rate locks available after commitment (extended rate locks also available), no processing fees (except with written approval), and non-recourse loans are assumable with lender approval and a 1% fee.
What are the advantages of HUD multifamily loans?
HUD multifamily loans offer many advantages, including 35-year fixed rate terms, full amortization, and leverage of up to 83.3% for market-rate apartment buildings or 87% for rental assistance properties. Additionally, HUD loans have few restrictions on borrower experience, unless you’re getting a construction loan, and their liquidity and net worth borrower requirements are far more flexible compared to even agency loans. For affordable properties, HUD multifamily loans offer increased LTV allowances, reduced DSCR requirements, and lower mortgage insurance premiums, or MIPs. They also fit well with the Low-Income Housing Tax Credit (LIHTC) program https://www.hud.loans/hud-loans-blog/lihtc-program-hud-multifamily-loans and the Rental Assistance Demonstration (RAD) program https://www.hud.loans/hud-loans-blog/rental-assistance-demonstration.
What are the eligibility requirements for Fannie Mae multifamily loans?
The Fannie Mae Multifamily Small Loan Program has a few understated caveats and requirements that borrowers should consider. Most importantly, there is zero-tolerance when it comes to borrowers being able to meet the minimum requirements for net worth and liquidity. Being able to meet those stated minimums can make or break the entire deal.
The program has a minimum expenditure requirement for specific expense line items like maintenance, payroll, management, and replacement reserves. Another detail worth noting is that the quality and condition of the subject property are of high importance. A property condition inspection is required for the deal, and any discovered deficiencies must be addressed and fixed before the transaction can close.
There are some lesser-known criteria for subject properties under the small loan program as well. Properties located in seismic zones 3 & 4 with subterranean or “tuck away” parking structures require a PML report. Properties with unreinforced masonry construction, as well as properties built before 1980 that have not had seismic reinforcements or retrofits completed are generally ineligible for financing. Non-Contiguous properties are eligible with a Fannie Mae waiver.
A Fannie Mae waiver is also required for phased properties as well. Properties that belong to an HOA or are a part of a PUD are typically ineligible. Borrowers should be aware that absentee ownership of any property financed through the program requires professional management.
In addition to the facts above, here are a few more things to take into consideration when shopping for a Fannie Mae Multifamily Small Loan:
- Even though the loans are non-recourse, key principals must sign an “exceptions to non-recourse” document, and face some liability
- Borrowing entities and key principals must undergo rigorous lien, litigation, and bankruptcy searches.
- There is a higher insurance expense in this type of transaction due to the higher coverage requirements in the secondary market.
- The Fannie Mae waiver that is required for non-contiguous and phased properties is difficult to obtain.
For more information on the Fannie Mae Multifamily Small Loan Program, including loan size, loan terms, amortization, minimum occupancy, interest only, accrual, and maximum LTV, please visit apartment.loans/fannie-mae-multifamily-small-loan-program.
What are the eligibility requirements for HUD multifamily loans?
HUD multifamily loans are designed to help borrowers of all experience levels access the financing they need to succeed in the multifamily housing market. The minimum credit score for most programs is just 620, and there are options for borrowers with even lower scores. Eligible properties for HUD multifamily loans must already be encumbered by HUD-insured loans.
For more information, please visit 5 Myths about HUD-Insured Multifamily Loans and HUD 241(a) Supplemental Financing for HUD Multifamily Loans.
What are the differences in terms and conditions between Fannie Mae and HUD multifamily loans?
The main difference between Fannie Mae and HUD multifamily loans is the loan terms. HUD loans have among the longest terms in the multifamily sector, with loan terms of up to 43 years. Fannie Mae loans, on the other hand, generally range between five and 30 years.