Have questions about FHA finance? Our experienced team has the answers. At Love Funding, our experts know the ins and outs of the FHA finance process and are there to guide you every step of the way. We have the knowledge and resources to manage the complex details of your transaction and answer any questions that may arise throughout the loan process and after closing.
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Federal Housing Administration (FHA) is an agency of the federal government housed within and managed by the Department of Housing and Urban Development (HUD). Therefore, FHA-insured loans are frequently referred to as HUD-insured loans. HUD-insured loans are fully guaranteed by the federal government and because of that guarantee, they bear some of the most favorable loan terms.
First, what is a Fannie, Freddie or CMBS Loan?
Freddie Mac (FHLMC or Federal Home Loan Mortgage Corporation) and Fannie Mae (FNMA or Federal National Mortgage Association) are Government Sponsored Enterprises (GSEs) which are private companies created by the federal government to provide liquidity in single-family and multifamily housing. Commercial Mortgage Backed Securities (CMBS) are totally private loans and focus on commercial real estate loans of all types including multifamily. Fannie, Freddie and CMBS loans are not federally guaranteed.
HUD-insured loans are fully guaranteed by the federal government and because of that guarantee, they bear the lowest interest rates at the highest leverage for the longest terms for multifamily loans. The below table compares the terms of HUD loans to other loan products:
|LTV / LTC||DSC||LOAN TERM||AMORTIZATION|
|HUD||85-90%||1.11-1.176x||35 and 40 years||Fully amortizing|
|Fannie, Freddie & CMBS||80% maximum||1.25x and up||7-10 years||25-30 years|
Absolutely not. While there are certain underwriting advantages provided for affordable properties, HUD mortgage insurance programs can be used to finance market-rate properties (properties where there are no income or rental rate restrictions), as well as seniors housing, healthcare facilities and hospitals.
HUD does not impose any restriction on either tenant incomes or rental rates as a condition of receiving a HUD-insured loan; meaning that market-rate projects can be financed with HUD-insured loans. However, there might be rent or income restrictions imposed on the property by the use of Section 8 rental assistance, public financing and/or subsidies such as Low-Income Housing Tax Credits (LIHTC), tax-exempt bonds or subordinate loans provided by a state or local agency or other financing source.
Generally speaking, affordable transactions are those which meet both of the following requirements:
- Rent and income restrictions must be imposed, monitored and enforced by a governmental agency for at least 15 years after closing in the case of refinance or acquisition loans; and final closing in the case of new construction or substantial rehabilitation loans (i.e., after completion of construction or substantial rehabilitation), and
- A Project-Based Section 8 contract for 90% of the units, or
- A recorded Regulatory Agreement requiring the project to meet at least the minimum Low-Income Housing Tax Credit (LIHTC) restrictions of 20% of units at 50% of area median income (AMI), or 40% of units at 60% of AMI, with economic rents (i.e. the portion paid by the residents) on those units no greater than LIHTC rents or Project-Based Section 8 contract for 90% of the units.
Yes. The HUD 221(d)(4), 220 and 232 new construction and substantial rehabilitation programs are unitary loans providing a 40-year fully amortizing permanent loan post-construction. The loans convert automatically from construction to permanent loans without the need to satisfy any additional debt service coverage, loan to value or other conversion covenants. Prior to loan closing, the borrower locks both the interest rate during construction and during the permanent loan phases (typically the same interest rate for both periods). This is one of the many benefits of a HUD-insured loan and eliminates your interest rate risk during construction.
HUD-insured loans bear low, fixed-interest rates that are generally 50 to 100 basis points lower than Fannie Mae or Freddie Mac financing products, and even lower when compared to conventional bank financing.
Love Funding serves as the lender and servicer for all HUD-insured loans. HUD acts as the provider of mortgage insurance and regulator of the borrower; HUD does not provide loan proceeds. In addition to being an approved FHA lender, Love Funding is also an approved Ginnie Mae issuer and servicer. Upon receipt of HUD’s firm commitment to insure a loan, Love Funding then locks the interest rate by selling a mortgage backed security which is guaranteed by Ginnie Mae to one of our Ginnie Mae investor partners. This creates a wrapped security that includes full mortgage insurance from HUD and the Ginnie Mae guarantee. The result is an interest rate that is typically 50 to 100 basis points lower than other comparable financing products in the marketplace. Coupled with HUD’s fully amortizing long terms, the lower interest rate typically produces tremendous additional cash flow for borrowers.
A direct-to-HUD execution may not be possible if there are certain timing constraints in play. For those instances (i.e. acquisitions with short contract periods, refinances with expiring debt, new construction or substantial rehabilitation developments that need to break ground quickly), Love Funding has a bridge-to-HUD loan program. Love Funding utilizes the balance sheet of our parent company, Midland States Bank, to provide bridge loans nationwide and typically, a HUD execution is the planned takeout. The bridge financing is based on traditional bank credit underwriting and can be executed in 30-90 days. Fees are usually more competitive than other bank debt because of the relationship between Love Funding and Midland States Bank.
HUD REFINANCE & ACQUISITION
HUD refinance and acquisition loans typically take about 6 months from the time we are engaged by a borrower until closing. The process involves three main phases:
- Underwriting due diligence by Love Funding
- Application submission to HUD and review by HUD which leads to issuance of the firm commitment
- The closing process with HUD
Affordable refinancing and acquisition transactions, especially those involving new Low-Income Housing Tax Credits (LIHTCs), will get priority from HUD and may receive expedited reviews. One of the most important factors in condensing the overall timeframe is a quick response from the borrower when information is requested. For example, Love Funding recently closed four transactions for the same borrower in five months from start to finish. All parties were in sync, including tremendous cooperation from the local HUD office. A lender’s relationship and track record with the local HUD office can be an important factor when determining the time it will take HUD to complete their review of the application.
Streamlined refinances through HUD’s 223(a)(7) program, which involves refinancing a loan that is currently insured by HUD, can be completed in 90 days. Loan modifications through HUD’s Interest Rate Reduction (IRR) program, which involves simply reducing the interest rate on a loan that is currently insured by HUD, can be completed in 60 days.
NEW CONSTRUCTION & SUBSTANTIAL REHABILITATION
New construction and substantial rehabilitation loans take 9-15 months on average from the time we are engaged by a borrower to get to closing, depending on where the developer is in the process at the time of engagement. Receipt of plans, specs and costs for third-party review are critical components and largely dictate the actual timeframe to get to closing. Affordable projects will get priority from HUD, especially those involving new LIHTCs. The process involves several phases including:
- Concept Meeting
- Underwriting due diligence by Love Funding
- Pre-application submission to HUD and review by HUD which leads to the issuance of the invitation letter
- Additional underwriting due diligence by Love Funding (primarily of the plans, specs and costs)
- Firm application submission to HUD and review by HUD which leads to issuance of the firm commitment
- The closing process with HUD
For affordable transactions and qualified market-rate transactions, the borrower and lender have the option of proceeding straight to the firm application stage, which eliminates the pre-application due diligence and submission to HUD.
There are several types of HUD-insured loans for multifamily housing and healthcare facilities. All loans are fully amortizing. Refinances can receive a maximum term of 35 years. New construction or substantial rehabilitation loans have an interest-only period of up to 24 months depending on the construction or substantial rehabilitation period followed by a permanent loan term of up to 40 years following the interest-only period. Debt service coverage ratiosrange from 1.11x to 1.176x depending on the type of loan. HUD-insured loans typically have the lowest rates of all the loan programs of federal agencies and GSEs (Government-Sponsored Enterprises) including USDA, Fannie Mae and Freddie Mac; and its insured loans have higher leverages.
For additional information please refer to our term sheets.
Fees and costs of a HUD-insured loan fall into several categories, including processing and underwriting, mortgage insurance premiums and lender fees.
Costs of processing and underwriting include third-party due diligence costs such as appraisal, market study, Capital Needs Assessment (CNA), insurance review and environmental site assessment, and a mortgage insurance application fee and inspection fee to HUD. For new construction loans, third party architectural and construction cost reviews are also required.
Mortgage insurance premiums ranging between 0.25% and 1.00% of the loan amount are payable to HUD at loan closing and during the life of the loan and vary by program. Borrowers are also responsible for title and recording costs, and for their own legal costs.
Fees to the lender include financing and placement fees and pass through expenses such as lender legal costs and a Ginnie Mae fee. During the life of the loan, escrows must be maintained with the lender for payment of property taxes, insurance premiums, and mortgage insurance premiums.
Personal financials are generally only required for those individuals that meet HUD’s definition of an Active Principal. The most recent edition of HUD’s MAP Guide defines Active Principals as “individuals or entities who singly or with others, direct and control the borrower and are responsible for the borrower’s ability to execute any and all actions for the benefit of the project, regardless of the extent of their equity interest.” As a general rule, Active Principals are directly or indirectly general partners of a limited partnership borrower, or managers or managing members of a limited liability company borrower. Under some structures, principals without control but owning 25% or greater interest (10% for corporations) in the borrower, may be required to submit personal financial statements. Note however, that personal financials are not required of board members or officers of nonprofit borrowers.
Personal financial statements are not required for refinance or acquisition loans. Personal financial statements are only required from any individuals providing cash required to close the loan and fund escrows, as well as those individuals identified as principals on loans under the new construction or substantial rehabilitation programs.
Borrowers should have positive relevant experience, positive credit history, and demonstrate liquidity and net worth that are sufficient to support the project. For new construction or substantial rehabilitation projects, experience developing and building comparable multifamily property is strongly preferred for owners, general contractors and architects; this is required for loans over $25 million. HUD also sets specific liquidity and net worth requirements for loans in excess of $75 million which require liquidity of at least 7.5% of the loan amount and net worth of at least 20% of the loan amount.
Borrowers, operators and management agents must have at least three years of experience successfully operating multiple projects with the types of beds proposed. Those participants with experience successfully operating only one project must have a longer operating history than three years. Experience in a market near the proposed market is more highly valued than experience in a different region of the country. The experience must include marketing, operating, and where applicable, developing and leasing up the types of beds proposed. Experience of the management agent or operator is generally not an acceptable mitigant to offset the borrower’s lack of experience.
For new construction or substantial rehabilitation projects specifically, HUD utilizes the below matrix to assess the strength of the borrower, operator and management agent. “Weak” participants may still qualify provided appropriate mitigants are demonstrated.
HEALTHCARE NEW CONSTRUCTION EXPERIENCE MATRIX
Please scroll horizontally to see the full table.
|Successful Relevant Experience in ALF/SNF||10 or more facilities||3 to 9 facilities||1 to 3 facilities*|
|Successful Experience Marketing & Leasing Up||10 or more facilities||3 to 9 facilities||1 to 3 facilities*|
|Net Worth||Greater than loan amount||Equal to loan amount||Less than loan amount|
|Percent Total Equity in Deal||30% or more||20% to 30%||Less than 20%|
|Land Value||Will purchase after construction financing secured||Equity contribution – Purchased within the past 2 years||Equity contribution – Purchased more than 2 years ago|
*Borrower/operator/management agent with no prior experience will not be considered
Projects are ineligible to be refinanced with a HUD-insured loan if the property was constructed or substantially rehabilitated within three years of the loan application submission. HUD has deemed this the Three-Year Rule.
A HUD-insured loan under the 221(d)(4) program can provide both construction and permanent financing of improvements where no construction work has been completed to the site prior to initial closing. HUD’s MAP Guideprovides guidance on which costs are considered mortgageable (eligible to fund from mortgage loan proceeds), but the treatment of certain costs can vary based on whether the transaction is affordable or whether the parties involved have any identities of interests as defined by HUD. A Love Funding originator will be happy to review your budget to assist in determining which costs qualify.
The most common mortgageable costs are as follows:
- Structures, accessory structures, general requirements, builders overhead
- Architectural fees of all design disciplines including civil, mechanical, electrical and plumbing (MEP), structural, landscape and interior design
- Additional construction fees (i.e. permit, tap/connection, impact, cost certification, energy consultants, geotechnical, municipal review, surveys)
- Bond premium
- Legal expenses of the borrower
- Organizational expenses (such as fees to create new entities, third-party report costs, third-party construction services)
- Furniture, fixtures and equipment (FF&E)
- Land improvements
- Land value
- Insurance: taxes and insurance during construction, builders risk and general liability insurance
- Title and recording
- Financing fees and all HUD fees
The cost of demolition is only mortgageable for substantial rehabilitation loans. Builder’s profit is a mortgageable expense, except when BSPRA is being used. On affordable projects choosing not to utilize either BSPRA or SPRA, a developer fee is also considered mortgageable.
- HUD prohibits developer fees as a mortgageable expense on market-rate transactions with a for-profit borrower. However, Builder’s and Sponsor’s Profit and Risk Allowance (BSPRA) is allowed for market-rate transactions. BSPRA is a mortgageable cost and is based on 10% of total development costs (not including acquisition cost).
- HUD allows developer fees on all Low-Income Housing Tax Credit (LIHTC) transactions. The developer fee amount is limited by the Allocation Agency’s allowed fee and is considered a mortgageable cost. Note, although a developer fee is allowed on a LIHTC Section 202 rehabilitation/second refinance, it is considered non-mortgageable meaning the developer fee must be paid from a source other than the HUD-insured loan proceeds. This is the one exception to the rule.
- For new construction or substantial rehabilitation programs, HUD prohibits the inclusion of both BSPRA and a developer fee.
For more information on BSPRA, click here.
When Congress enacted the 221(d)(4) program, the intent was to encourage contractors to develop more HUD-insured apartment projects. In order to accomplish this goal the program will recognize as a cost, a Builder’s and Sponsor’s Profit and Risk Allowance (BSPRA) when an identity of interest exists or will be formed at or before closing between the borrower entity and the general contractor. Because there is no actual cost associated with this allowance, the borrower benefits because the cost basis is raised and mortgage proceeds are maximized. BSPRA can benefit certain borrowers because it reduces the cash equity requirement of the borrower to close the loan. For more information on BSPRA, click here.
The Davis-Bacon Act of 1931 requires contractors to pay a prevailing wage as predetermined by the Department of Labor for federally assisted projects. HUD-insured new construction and substantial rehabilitation transactions are considered to be federally assisted projects, and therefore are subject to these minimum wage rates. Refinance and acquisition transactions are not subject to Davis-Bacon wages.
Davis-Bacon wage rates are based on location and type of work and are updated periodically. Multifamily and healthcare transactions four stories or less are generally considered Residential Construction while those over four stories are considered Building Construction. The most recent rates for your area can be found here.
A HUD-insured loan may be assumed by a different borrower through the TPA (Transfer of Physical Assets) process, which typically happens in conjunction with the sale of a property or a sale of interests in a borrower. TPAs are subject to lender and HUD approval.
Love Funding’s dedicated in-house TPA team, made up of underwriting, asset management and legal staff, assists our borrowers and prospective buyers with the TPA process. Changes in operators and management agents must also be reviewed by the lender and approved by HUD. Lender and HUD fees apply.
The sale of a property triggers either a payoff or an assumption of the HUD-insured loan. If the loan is to be paid off, then prior approval from HUD for termination of the mortgage insurance is required. If the loan is to be assumed by the buyer, then a TPA (Transfer of Physical Assets) application is prepared and submitted to HUD for approval. In either case, Love Funding’s asset management team facilitates obtaining HUD approval for the proposed action.
As the provider of mortgage insurance for a HUD-insured loan, HUD works closely with Love Funding’s asset management staff to closely monitor risk factors and overall project performance. Some general regulatory requirements that apply to a HUD-insured loan include, but are not limited to, the following:
- Borrowers submit annual audited statements to HUD and to Love Funding
- Operators of healthcare facilities submit cumulative quarterly financial statements to HUD (via Love Funding)
- For multifamily properties, borrowers may take distributions semi-annually or annually based on available surplus cash. For healthcare properties, borrowers may take distributions more frequently so long as the distributions do not exceed surplus cash as calculated during each semi-annual period. Operators of healthcare properties may take distributions so long as on a quarterly and annual basis there is positive working capital (as defined by HUD)
- Advances from project replacement reserves and other escrows (such as non-critical repairs, operating deficit, working capital contingency and debt service reserves) require HUD, and generally, lender approval
- Any change in management agent, operator and certain changes within the borrower or operator entity require prior HUD approval
- Assignment of the loan to a new borrower requires prior HUD approval
- Termination of mortgage insurance (in connection with paying off the loan) requires HUD approval
- Reconfiguration or changes in the unit mix of a project requires prior HUD approval
Yes, a borrower can do a cash-out refinance with HUD. The maximum allowed is up to 80% loan to value (assuming this amount is lower than all other HUD mortgage underwriting criteria). If there are non-critical repairs required to be completed post-closing as identified in the Capital Needs Assessment (CNA) for the property, 50% of the cash-out proceeds will be held in escrow until all of these repairs are completed and approved by HUD.
On new construction or substantial rehabilitation loans where replacement cost determines the loan amount and the value of the land is greater than the debt, it is also possible to cash out. Cash out can be used at closing to fund escrows; otherwise, the cash out is deferred until the project is complete and achieves six consecutive months of break-even occupancy, or 12 months break-even occupancy for transactions meeting large loan parameters.
A borrower cannot cash out through a HUD transaction. However, healthcare facility borrowers no longer have to meet the previous two-year debt seasoning requirements. A borrower can cash out through a bridge loan and then immediately refinance through HUD with the following restrictions:
- If less than half of the bridge debt is cash out, the two-year seasoning requirement is eliminated and the maximum loan to value for the HUD-insured loan will be 70%.
- If more than half of the bridge debt is cash out, the two-year seasoning requirement is eliminated and the maximum loan to value for the HUD-insured loan will be 60%.
Borrowers still have the option to cash out through a bridge loan and allow the debt to season for two-years. At which point, borrowers are able to refinance through HUD with a maximum loan to value of 80%.
Yes, they can.
According to the MAP Guide, HUD-insured multifamily properties may be traditional multifamily structures on a single site, or may be detached, semi-detached or row houses. Each property must consist of five or more dwelling units. The site may consist of two or more noncontiguous parcels of land when the parcels comprise one marketable, manageable real estate entity and each parcel (or combination of contiguous parcels) has at least five units. For example, Love Funding has financed one affordable project located on more than 50 parcels and another affordable project located on more than 150 parcels.
The following factors determine whether a scattered site property is one marketable, manageable real estate entity:
- Distance: Generally, a greater distance would be acceptable in a rural area than in an urban area, but no two projects funded by one HUD-insured multifamily mortgage should be greater than 15 or 20 miles away from each other.
- Physical condition, construction type, and age. If individual sites vary in these criteria, it is more difficult to make the case that they comprise a single entity, and to evaluate the collateral. If the project cannot be analyzed with one Capital Needs Assessment (CNA) and one appraisal, it is not one real estate entity.
- Occupancy type and turnover history
- Unit configuration and project layouts
- Expense volatility, particularly for single-family structures or more widely disbursed propert
HUD’s healthcare programs will allow up to 25% of the beds in a Section 232 (healthcare) project to be for independent living residents. Independent living units may be licensed or unlicensed. The units must be of a complimentary design and use to the rest of the project.
Under HUD’s multifamily programs, it is possible to refinance unlicensed senior apartments. Generally speaking, there cannot be any occupancy restrictions in place discriminating against persons in a household younger than 62, other than the qualifying head of household. Additionally, these properties cannot include a central kitchen or the provision of food services for the residents. The HUD Section 231 program provides construction financing for developments where all tenants must be 62 or older. Understanding the HUD requirements for financing senior housing properties takes experience with regards to age restrictions and services. So, we recommend that you reach out to one of our originatorsto guide you through this process and ensure that your property complies with all HUD requirements.
The Section 202 program was created in the late 1950s to provide supportive housing to the elderly. As defined by HUD, an elderly household is one with a head, co-head or spouse age 62 or older. The Section 202 program has had three major programmatic changes:
- From inception to 1974, very low-interest loans (most only 1%) were provided to reduce carry costs and afford lower rents.
- In the second phase from 1974 until 1991, 202s were financed with market-rate loans but provided with various rental subsidies to make the units more affordable.
- In the last phase, HUD provided direct capital grants, papered like loans, to projects to reduce capital costs and make the projects more affordable. HUD also provided a Project Rental Assistance Contract (PRAC).
These third phase projects are known as PRACs and the program has had no new funding since 2012. HUD now looks primarily to refinancing of Section 202 loans utilizing the Low-Income Housing Tax Credit program (LIHTC) to provide new or substantially rehabilitated senior housing.
Currently, HUD permits 202 projects to be refinanced under the Section 223(f) program with substantial rehabilitation possible for up to $40,000 a unit by using LIHTCs and also to be more completely recapitalized under the 221(d)(4) substantial rehabilitation program.
Yes, secondary or subordinate financing is allowable in most situations with some limitations. Federal, state, or local government secondary financing and other quasi-public financing sources (HOME funds, Federal Home Loan Banks, Grants, Affordable Housing Program) are allowed under all loan programs up to 100% of the fair market value or replacement cost.
Private secondary financing under the Section 223(f) and Section 232/223(f) refinance/acquisition loan programs is limited to 92.5% of fair market value but is generally not allowed under the Section 220/221/232 new construction or substantial rehabilitation programs (with exception of seller-financing on multifamily construction).
Public financing is often approved to be secured by a subordinate mortgage. Private financing is almost never approved to be secured by a subordinate mortgage; instead it is typically secured, if at all, by a pledge of interests in the borrower.
Yes, certain types of consultants can receive a fee on a HUD-insured loan, but the eligibility varies based on the type of consultant and any identity of interest. Please contact a Love Funding originator for further details.
Third-party consultants engaged by Love Funding to complete reports for the HUD-insured loan can receive a fee. A third-party consultant hired by a borrower to control and manage construction through construction completion and final loan closing can also receive a fee.
When a developer fee is permitted to be included in a loan transaction, a reasonable consultant fee can be paid out of the developer fee. When no developer fee is being paid, nonprofit borrowers under the 221(d)(4) program may include a housing consultant fee as an organizational expense, but the fee is limited to the greater of $40,000 or 10% of the estimated total for all improvements, carrying charges, legal, organizational and audit fees.
Loan consultants and/or mortgage brokers must be paid solely from the lender’s fees and cannot have any identity of interest with the borrower or any affiliated entity.
The Mark-to-Market (M2M) program preserves low-income rental housing affordability while reducing the long-term costs of federal rental assistance, including Project-Based Rental Assistance from HUD, for certain multifamily rental properties.
Projects that can be refinanced under this program are projects with HUD-insured or HUD-held loans that also have contracts for Project-Based Rental Assistance from HUD, primarily through the Section 8 program, wherein the average rents for the rent-assisted units exceed the rent of comparable properties.
The Mark-to-Market program objectives are to:
- Preserve housing affordability while reducing the costs of Project-Based Rental Assistance
- Restructure the HUD-insured or HUD-held loan so that the monthly payments on the HUD-insured first mortgage can be paid from the reduced rental levels which have been “marked down to market rents”
- Reduce the costs of mortgage insurance claim
- Ensure competent management of the project. The restructured project is subject to:
- A HUD-insured 223(a)(7) loan that can be supported by the reduced rental levels
- A HUD-held second mortgage (a Mortgage Restructuring Mortgage)
- Sometimes a HUD-held third mortgage (a Contingent Repayment Mortgage) and also to long-term use and affordability restrictions and the current HAP contract is extended. The restructured assets are physically and financially viable and provide competitive returns to owners.
Properties subject to a condominium regime but that are now operating as a rental project may be refinanced under the 223(f) program provided ownership of all units is held by a single owner with no individual unit ownership, and the property meets other program guidelines.
Condominium regimes are similarly permitted under new construction and substantial rehabilitation proposals that meet these same requirements. HUD may consider a waiver for a condo with a limited number of individually owned units (10% or less of total units) provided the units are located in a separate building or in a separate section of a single building apart from the rental units.
A cooperative (coop) can be refinanced with a HUD-insured loan. In order to be eligible, HUD requires that 75% of the total number of units are owned and occupied by coop members (none owned by original developer), the average physical occupancy is at least 95%, the project reports healthy turnover and there is no history of shareholders not paying dues/fees. Please note that an equity take-out is not permitted for cooperative housing projects.
Age-restricted coops, also known as “Golden Age Coops” can be financed as long as the head of household is 62 or older, and occupancy is not restricted to any remaining occupants.
New construction, rehabilitation, acquisition and resale of individual memberships cannot be financed under HUD’s multifamily finance programs, but are eligible under Section 213 of the National Housing Act, which can be processed usingtraditional application processing (TAP).
Still have questions? Contact us for additional information.