5 Myths about HUD-Insured Multifamily Loans
What do you know about FHA-backed loans for apartment buildings? This article dispels five of the most common myths about HUD multifamily loans.
- Myth #1: HUD Multifamily Loans Are Only for Low-Income/Affordable Housing
- Myth #2: HUD Loans Are Only for New Construction
- Myth #3: HUD Financing Means Less Flexibility
- Myth #4: HUD Financing Is Only for Experienced Borrowers With Perfect Credit
- Myth #5 HUD Loans Are Expensive
- Related Questions
- Get Financing
Multifamily loans insured by the Department of Housing and Urban Development are often some of the best financing options available to investors. HUD loans have comparatively longer loan terms than most other commercial mortgages, are fully amortizing, have minimal debt service coverage ratio requirements, and offer some of the lowest fixed interest rates in the industry.
That being said, If you're considering a HUD-insured loan to finance your next multifamily purchase, you may have come across some conflicting information. In this article, we'll dispel some of the most common myths about HUD multifamily loans.
Myth #1: HUD Multifamily Loans Are Only for Low-Income/Affordable Housing
One of the most common misconceptions about HUD financing is that it’s only available for low-income housing. While it's true that most of HUD's multifamily programs do support the development and preservation of affordable housing, they're also available for a wide range of other property types, including senior housing, student housing, and, yes, even market-rate apartments.
In truth, as long as the borrower and the target property can meet the eligibility requirements of the specific HUD program, HUD financing is technically available for any market-rate housing property. The origins of this myth more than likely stem from the FHA’s single-family loan offerings that mostly cater to low- and middle-income households.
Myth #2: HUD Loans Are Only for New Construction
Another common myth about HUD multifamily loans is that they're only meant for financing the new construction of a multifamily asset. While HUD does offer a stellar loan program for new construction — the fixed-rate, non recourse 221(d)(4) loan — they're also available for the purchase of existing properties as well as for the refinancing of existing loans.
In fact, HUD offers an assortment of different loan insurance programs meant to cover an array of different investment needs. For example, there is the HUD 241(a) loan for supplemental financing, HUD’s 232 loan that covers construction and rehabilitation specifically for senior living facilities, and the popular 223(a)(7) program for refinancing existing HUD loans.
Myth #3: HUD Financing Means Less Flexibility
Some borrowers believe that HUD financing comes with less flexibility than other types of loans, but this is a myth. HUD loans are actually quite flexible, and — as previously mentioned — can be used for a variety of purposes, including the purchase or refinancing of multifamily properties, senior housing, healthcare facilities, and more. HUD loans can also be used for the construction of new properties or the substantial rehabilitation of existing ones.
HUD loans are also non-recourse, meaning that borrowers are not personally liable for the loan, protecting their livelihoods if the borrower defaults on the mortgage.
Finally, HUD loans are fully assumable. Besides giving borrowers a viable exit strategy, that can also 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.
Myth #4: HUD Financing Is Only for Experienced Borrowers With Perfect Credit
While experience is always a plus, it's not generally a hard requirement for HUD financing. After all, HUD's multifamily programs are designed to help borrowers of all experience levels access the financing they need to succeed in the multifamily housing market.
Another common misconception about HUD loans is that you need perfect credit to qualify. This simply isn't true. While having good credit will certainly give you a leg up in the application process, it's not a requirement. In fact, HUD's multifamily loan programs are designed for borrowers with less-than-perfect credit. The minimum credit score for most programs is just 620, and there are options for borrowers with even lower scores.
Myth #5 HUD Loans Are Expensive
A final myth about HUD-insured loans is that they're expensive. Objectively speaking, this just isn't the case. It is true that the cost of HUD multifamily financing will vary depending on a number of factors, including the type of property, the location of the property, and the loan terms. However, in general, HUD multifamily financing can be quite affordable, especially when compared to other types of financing. HUD's multifamily loan programs offer competitive interest rates and terms. And, because they're government-backed, HUD loans often come with lower fees than traditional loans.
That said, while they aren’t more costly than some other commercial mortgage options, there are a few different fees (such as HUD’s different mortgage insurance premiums, or MIPs) associated with HUD-insured loans worth preparing for:
Upfront Mortgage Insurance Premium: This is a one-time premium that is paid at closing. The amount of the premium depends on the loan amount, loan term, and the loan-to-value ratio.
Annual Mortgage Insurance Premium: This is a yearly premium that is paid in monthly installments. The amount depends on the loan amount, term, and the loan-to-value ratio.
Origination Fee: This is a fee charged by the lender for processing the loan. The amount of the fee varies by lender.
Discount Points: These are optional fees that can be paid at closing in order to lower the interest rate on the loan. One point equals 1% of the loan amount.
What are the benefits of HUD-insured multifamily loans?
HUD multifamily loans offer competitive interest rates, long terms, high leverage allowances, and are fully amortizing and non-recourse. In addition, HUD multifamily loans are fully assumable (with HUD/FHA approval). That makes these loans highly effective for borrowers who want to maximize their profits and reduce their financial risk.
HUD multifamily loans also offer additional benefits for affordable properties, and are a great candidate for Low-Income Housing Tax Credits (LIHTCs), as well as housing located within Opportunity Zones. They can also work well with the Rental Assistance Demonstration (RAD) program, which allows certain properties under HUD legacy programs for affordable properties to convert their housing to the HUD Section 8 program.
What are the requirements for obtaining a HUD-insured multifamily loan?
HUD-insured 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. However, HUD/FHA multifamily loans may require significant documentation and may take longer than many other loan types to be approved. Investors/borrowers likely need one or more professional advisors to guide them through the entire process.
What are the advantages of HUD-insured multifamily loans compared to other types of financing?
HUD-insured multifamily loans offer many advantages compared to other types of financing. These loans carry very long loan terms — some even beyond 40 years — and are fully amortizing with a fixed interest rate for the life of the loan. Leverage for these loans can go up to 87% — even higher in some situations. 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. The main drawback of a HUD loan is in its timing, as it can take more than six months to close.
Source: Multifamily Financing: Your Comprehensive Guide and The Pros of Investing in Apartments Early
What are the risks associated with HUD-insured multifamily loans?
HUD-insured multifamily loans are backed by the government, so the risk of default is lower than with other loan types. However, there are still risks associated with these loans. For example, HUD-insured loans typically have higher origination costs than other loan types, which can make them more expensive. Additionally, HUD-insured loans can take longer to process than other loan types, so they may not be the best option for borrowers who need financing quickly. Finally, HUD-insured loans may not be the best fit for merchant builders, as they are designed for long-term financing. For more information, please see Multifamily Loans' Guide to HUD-Insured Loans.
What are the most common misconceptions about HUD-insured multifamily loans?
The most common misconception about HUD financing is that it’s only available for low-income housing. This is not true, as HUD financing is available for a wide range of other property types, including senior housing, student housing, and market-rate apartments, as long as the borrower and the target property can meet the eligibility requirements of the specific HUD program. Another common misconception is that FHA loans are only for affordable housing. Again, this is not true, as FHA financing is available for nearly any market-rate property, provided it meets all eligibility criteria.
Source: 5 Myths about HUD-Insured Multifamily Loans and 5 Myths About FHA-Insured Multifamily Loans
How can I find the best HUD-insured multifamily loan for my needs?
The best HUD-insured multifamily loan for your needs will depend on your specific situation. You can navigate our website as well as Multifamily Loans to understand all the multifamily financing options available in order to make the best choice. You can also contact us today for a free quote by sending an email to hello@hud.loans.