Know the five common missteps that can complicate underwriting
by Denise Troeschel, senior vice president and co-chief underwriter, Love Funding
As published in Scotsman Guide's Commercial Edition, January 2014
In recent years, multifamily and health-care property developers have flocked to loan-insurance programs run by the U.S. Department of Housing and Urban Development (HUD) as traditional financing options first became scarce and then failed to rebound from pre-crisis levels.
In fact, in fiscal-year 2012, HUD endorsed 158 new construction or substantial-rehabilitation multifamily projects, totaling $2.33 billion in loan volume. In addition, the Office of Healthcare Programs received 716 applications in fiscal-year 2012, a dramatic increase from the 224 received in fiscal-year 2008. Overall loan commitments for both the health-care and multifamily loan programs have increased from less than $5 billion in fiscal-year 2008 to nearly $20 billion in fiscal-year 2012.
Despite these increases, the HUD underwriting process remains challenging for many borrowers. With thorough preparation, commercial mortgage brokers can avoid unpleasant surprises that often lead to delays in funding. With the knowledge of what underwriters look for in HUD loans, brokers can save clients the shock of seeing their deals derailed by unexpected requests.
For decades, HUD has served essentially as the lender of last resort for many multifamily and health-care property developers. But as more borrowers have become familiar with the benefits of Federal Housing Administration (FHA) financing, they continue to come back for more. Because FHA loans are backed by the government, their interest rates are highly competitive. HUD’s programs allow for fixed, long-term financing — as long as 40 years for new construction. The loans also are nonrecourse, meaning the lender only can pursue the collateral put up to recover the loan in the case of default; the government must make up the difference.
This last attribute makes the agency especially diligent when agreeing to back a new loan. Commercial mortgage brokers and borrowers who have gone through HUD loan processing know how rigorous HUD underwriting standards are. But many borrowers making use of these important programs today are first-timers. They approach a HUD loan transaction much like they would an application for traditional financing, and soon grow frustrated and disappointed when the lender’s underwriter starts peppering them with questions.
But these questions are a good sign that your lender is working hard to anticipate what HUD is likely to ask once the application is submitted. It’s better to tackle any issues the lender identifies before the application is submitted because there is a real risk that any delays could be prolonged if HUD is the one asking the questions and you’re unprepared to answer them. With many borrowers interested in HUD financing these days, there’s always another application waiting in the wings. Sometimes, applications can be sent to the back of the line if all of the information needed isn’t readily available, adding weeks — if not months — to the wait.
It is important to realize that some of these mistakes are entirely avoidable. Commercial mortgage brokers can help borrowers navigate these programs by keeping the following five points in mind. They also should be prepared to correct them before they needlessly jeopardize their transactions.
1. Inadequate plans
Architects by nature are fastidious when it comes to providing details, but they often come up short in the plans they submit to HUD, particularly in areas pertaining to plan format, square-footage calculations, architectural agreement and signature details. Many times, the information provided is in direct conflict with the agency’s specific needs. HUD has an entire handbook devoted to architectural requirements, but the pages to dog-ear are the ones dealing with the myriad issues regarding accessibility.
According to the guidelines of the Uniform Federal Accessibility Standards and the American with Disabilities Act, each multifamily property must have a dedicated number of units that are accessible to those with mobility disabilities, in addition to a separate percentage of units adapted for auditory and visual impairments. These details must be expressed in the architect’s plans and specifications. In addition, the Fair Housing Act’s guidelines require all ground-floor units in walk-up apartments and 100 percent of units in elevator buildings must comply with FHA standards. The law also requires HUD multifamily properties to have a dedicated number of units that can be adapted to address accessibility in the future. Architects who aren’t experienced with HUD don’t understand these rules, and their plans are returned when they don’t comply, adding more time to the process.
2. Environmental lapses
Lead-based paint, asbestos, radon gas — these are but a few of the environmental issues that HUD takes seriously when reviewing a new construction or substantial-rehabilitation loan application. But still commercial mortgage brokers and borrowers occasionally submit applications where no due-diligence work around these kinds of potential dangers has been performed.