The Difference Between HUD and Fannie Mae Multifamily
By Terry Painter/Mortgage Banker, Author of The Encyclopedia of Commercial Real Estate Advice – Wiley Publishers, Member of the By Terry Painter/Mortgage Forbes Business Council
The differences between HUD and Fannie Mae Multifamily is that HUD is a government agency, and Fannie Mae is a Government Sponsored Entity (GSE) that is in conservatorship with the US Government. Although both guarantee losses from borrower defaults, HUD’s guarantee is backed by the full faith of the US Government where Fannie Mae’s is only backed by its own corporate financial solvency. HUD can lend more money than Fannie Mae and has a longer maximum fixed rate term of 35 years compared to Fannie Mae’s maximum of 30 years. Fannie Mae has partial term interest only payments available which HUD does not allow.
The Differences Between HUD and Fannie Mae Multifamily
| Fannie Mae | HUD | |
| Minimum Loan | $1,000,000 | $3,000,000 |
| Maximum Loan | None | None |
| LTV | 75 – 80% | 80 – 87% |
| Term | 5 – 30 Years | 35 Years |
| Amortization | 30 Years | 35 Years |
| DSCR | 1.25 – 1.55 | 1.176 |
| Loan Fee | 1.00% | 2.25% |
| Interest Rates | Fannie Rates | HUD Rates |
| Interest Only Pmts | 1 – 10 years | Not Available |
| Recourse | Non-Recourse | Non-Recourse |
| Time to Close | 60 Days | 180 Days |
| Assumable | Yes – 1% Fee | Yes - .50% Fee |
| Lending Territory | All Submarkets | All Submarkets |
| Prepayment Penalty | Yield Maintenance or declining | Declining |
| Required Occupancy | 90% for 90 days | 90% for 90 days |
| Mortgage Insurance | Not Required | Required |
| Rate Lock | At Loan Approval | At Loan Approval |
| Rate Lock Deposit | 1 – 2% Refundable | .50% Refundable |
| Tax Returns | Not Required | Not Required |
| Minimum Net Worth | Equal to Loan Amount | Not Specified |
| Post Closing Cash | 12 Months Loan Pmts. | Not Specified |
Is HUD or Fannie Better?
As you can see from the chart above, these two loan programs have far more similarities than differences, and have their pros and cons. As a mortgage banker, I have originated mortgages for both of these great loan programs for over 20 years. For larger apartment building loans of $3 million and up, I feel that HUD Multifamily Loans overall outperform Fannie Mae Multifamily Loans. This is because they can lend to more investors that have a net worth lower than the loan amount. Fannie requires that your net worth be at least equal to the loan amount. But most importantly for investors who want to keep the property long term, HUD’s 35 year fixed rate is often lower than Fannie Mae’s 10 year fixed rate.
If you are an investor whose main goal is to raise your cash on cash return, and you can get by with a 65% LTV loan, Fannie Mae’s interest only for the first 1 – 10 years is the loan for you. HUD doesn’t offer interest only. HUD is an especially good fit for investors who want to keep the property loan term since you can fix the rate for 35 years. Sure, you can fix a Fannie rate for 30 years, but the rate is going to be a lot higher than the 35-year fixed HUD loan rate. Keep in mind that for smaller loans, the loan expenses are higher and often do not pencil with a HUD loan which makes Fannie Mae a better choice.
Being able to close in 60 days with much less paperwork puts Fannie Mae on top. With HUD taking 6 months, there are not many sellers that can wait that long for a purchase. But if you are refinancing the time frame is not as much of an issue especially if you need to do some major remodeling which HUD really encourages. Both loan programs have Non-Recourse Financing which means you don’t have to personally guarantee the loan and risk losing your personal assets in the case of a default. And both loan programs lock the rate at loan approval with a refundable rate lock deposit and both are assumable loans. HUD requiring mortgage insurance to achieve up 85% or more leverage is an added cost that Fannie Mae loans don’t have.
The Differences Between HUD and Fannie Mae
HUD is a government agency who’s mission is to ensure that all individuals have access to quality housing in America. Fannie Mae is a Government Sponsored Enterprise (GSE), not a government agency, that has its finances overseen in a conservatorship by the US Government. Although both guarantee losses from borrower defaults, HUD’s guarantee is backed by the full faith of the US Government where Fannie Mae’s is only backed by its own corporate financial solvency.
For all the differences that HUD and Fannie Mae have, they have far more similarities. Both do not actually make loans, but establish underwriting guidelines, and guarantee the loans which are made by approved lenders. Both raise money for the loans by securitizing mortgage-backed security bonds on Wall Street. Both have residential and multifamily loan programs. In this article I will be going over the differences between HUD and Fannie Mae Multifamily loan programs.
Main Differences Between HUD and Fannie Mae Loans
The main difference is that HUD has higher closing costs and takes a lot longer to close. HUD Multifamily Loan Rates are lower than Fannie Mae Multifamily Loan Rates. With a higher LTV and a longer amortization, HUD can lend more money than Fannie Mae. With HUD you end up with a low rate 35-year fixed rate fully amortizing mortgage, that is often lower than Fannie Mae’s 10-year fixed mortgage.
With Fannie the longer you fix the rate – the higher the rate. Although you can fix the rate for up to 30 years fully amortizing, the rate will be much higher than HUD’s 35-year fixed rate loan. Be sure to go through the chart below and compare the similarities and differences for these two outstanding loan programs. Click on this link to learn just about everything you might want to know about HUD Multifamily Loans, and this link for Fannie Mae Multifamily Loans.
And here’s a HUD Multifamily Loan Glossary with 74 terms defined for a fast look up.
As you can see from the chart above, these two loan programs have far more similarities than differences, and have their pros and cons. As a mortgage banker, I have originated mortgages for both of these great loan programs for over 20 years. For larger apartment building loans of $3 million and up, I feel that HUD Multifamily Loans overall outperform Fannie Mae Multifamily Loans. This is because they can lend to more investors that have a net worth lower than the loan amount. Fannie requires that your net worth be at least equal to the loan amount. But most importantly for investors who want to keep the property long term, HUD’s 35-year fixed rate is often lower than Fannie Mae’s 10 year fixed rate.
If you are an investor whose main goal is to raise your cash on cash return, and you can get by with a 65% LTV loan, Fannie Mae’s interest only for the first 1 – 10 years is the loan for you. HUD doesn’t offer interest only. HUD is an especially good fit for investors who want to keep the property loan term since you can fix the rate for 35 years. Sure, you can fix a Fannie rate for 30 years, but the rate is going to be a lot higher than the 35-year fixed HUD loan rate. Keep in mind that for smaller loans, the loan expenses are higher and often do not pencil with a HUD loan which makes Fannie Mae a better choice.
Being able to close in 60 days with much less paperwork puts Fannie Mae on top. With HUD taking 6 months, there are not many sellers that can wait that long for a purchase. But if you are refinancing the time frame is not as much of an issue especially if you need to do so major remodeling which HUD really encourages. Both loan programs have Non-Recourse Financing which means you don’t have to personally guarantee the loan and risk losing your personal assets in the case of a default. And both loan programs lock the rate at loan approval with a refundable rate lock deposit and both are assumable loans. HUD requiring mortgage insurance to achieve up 85% or more leverage is an added cost that Fannie Mae loans don’t have.
What are the Advantages of HUD Loans?
In my opinion, the Advantages of HUD Multifamily Loans outweigh the Disadvantages of HUD Multifamily Loans if you are going to keep the property long term. This is because you can get the longest fixed rate with a lower rate with the HUD 223(f) Loan, than any other permanent loan program nationwide. The HUD 221(d)(4) Loan for new construction can fixed the rate for 40 years with the construction loan rolling over seamlessly to the permanent loan at the same rate. If you are wondering What is the Highest LTV Multifamily Loan in America, it’s a HUD Loan at 85% LTV for apartment buildings with market rents. This goes up to 87% for affordable rent properties. With the lowest Debt Service Coverage Ratio (DSCR) of any commercial loan, and the longest amortization of 35 – 40 years, HUD can lend more money.
What are the Advantages of Fannie Mae Loans?
Fannie Mae Multifamily loans offer Non-Recourse Financing. Fannie Mae Multifamily Loan Rates, are especially low if you want to fix the rate for 10 or 12 years. Having a partial term interest only option which greatly lowers your payments makes these loans very desirable. This is something that banks never offer. However, Freddie Mac Multifamily Loans do if you want to check that loan program out. Fannie Mae can lend in almost any size population community which Freddie Mac cannot do. Fannie Mae offers supplemental financing after a year if you need to borrow more. These loans can close in as little as 45 days if you have a purchase that needs to close quickly.