Advantages of a HUD Multifamily Loan
By Terry Painter/Mortgage Banker, Author of The Encyclopedia of Commercial Real Estate Advice – Wiley Publishers, Member of The Forbes Real Estate Council
17 Advantages of a HUD Multifamily Loan:
| *Highest LTV at 80 – 90% | *1.176 DSCR Market Rents |
| *Cash Our for Any Reason | *1.15 DSCR Affordable Rents |
| *Unlimited Loan Size | *Same Rate Construction Roll over to Perm |
| *35 Year Fixed Rates | *No Global or Debt to Income Ratio |
| *40 Year Fixed Rate New Construction | *Assumable |
| *No Tax Returns Required | *Non-Recourse |
| *Supplemental Financing Available | *Lowest Long Term Fixed Rates |
| *35 Year Amortization Existing Property | *40 Year Amortization New Construction. |
*Rate can be Lowered in the Future with a Loan Modification.
Top 10 HUD Multifamily Loan Advantages
1. Lowest Long Term Fixed Rates – HUD Multifamily Loan Rates are lower than Fannie Mae Multifamily Loan Rates and Freddie Mac Multifamily Loan Rates. And a much lower rate than the best 10 year fixed commercial bank loans. HUD interest rates can be fixed for 35 years on an acquisition or refinance, and 40 years for ground up construction or substantial rehabilitation financing. Click on this link to compare today’s Multifamily Loan Rates for 12 loan programs.
2. Highest LTV Loan – Where just about all commercial banks top off at 75% LTV for apartment properties, and Fannie Mae and Freddie Mac say they can hit 80%, only HUD 223(f) loans can in most cases actually get you to an 80% LTV. Why? Because HUD Multifamily Purchase or Refinance Loans have the lowest rates, longest amortizations at 35 years which push you there. And HUD can actually go up to 85% LTV on a purchase, and 85% for a refinance without cash out. HUD Multifamily LTVs are even higher for HUD Affordable Rent Multifamily Loans at 87% LTV and HUD Subsidized Rent Multifamily Loans at 90% LTV.
3. Highest Loan to Cost – If you are a developer and are competitively shopping for ground up, or substantial rehabilitation multifamily financing, its hard to beat the HUD 221(d)(4) Loan. These loans go up to 85% Loan to Cost for Market Rate Apartment Buildings, and 87% Loan to Cost for HUD Affordable Rate Apartment Buildings. Keep in mind that banks usually max out at 75% Loan to cost during good times and 60 – 65% loan to cost during recessions. HUD construction loan sizes do not get a lot smaller during recessions and roll seamlessly to a 40 year fixed rate perm loan at the same rate as your construction loan. Check out HUD 221(d)(4) Loan Rates.
4. Cash Out for Any Reason when Refinancing – that’s right! When refinancing, the cash out is your money to do with as you like. Banks do usually like cash out unless you are using it to improve the property.
5. The Longest Term Fully Amortizing Loan – HUD is the only multifamily loan program that can fix a rate for 35 years with a 35-year amortization on a purchase or refinance and 40 years with a 40 year amortization for new construction or substantial rehabilitation.
6. Get a Better Rate in the Future – If rates go down in the future, you can apply for a loan modification at a nominal cost and swap out for a current lower rate. This is an advantage that I assure you no other multifamily loan program has.
7. No Tax Returns Required – All banks are required by the Feds to do what’s called a global ratio based on the borrower’s tax returns. This is like a debt to income ratio, and calculates your ratio of income for all personal, business and investment income. If you don’t have at least an extra 30 – 40 cents for each dollar of debt – sorry – no loan. This would be a 1.30 to 1.40 global ratio. So if you are self-employed and don’t show much income on tax returns, a hud multifamily loan doesn’t collect them.
8. Non-Recourse Financing – All HUD Multifamily Loans have Non-Recourse Financing, which means the borrowers do not have to personally guarantee them. With recourse financing, if the property fails and you default on the loan, they can get a court judgement that allows the lender to put a lien on any or all of your personal assets to pay for a deficiency once they sell the property. With a non-recourse loan, if the property goes south, all you have to do is give them the keys to the property. Although painful, its much better than losing so much of everything else you have worked for your whole life.
If you are raising investors non-recourse financing is a must because those that are putting in the most cash won’t be required to guarantee a loan either. This especially useful when forming a Real Estate Syndication with passive investors.
9. Lowest Debt Service Coverage Ratio – HUD Multifamily Loans have the lowest Debt Service Coverage Ratio (DSCR) at a 1.176 than any other multifamily loan program. Most Fannie Mae, Freddie Mac loans, and most commercial bank loans have a minimum 1.25 DSCR. This along with the lowest rates, highest LTVs, and longest amortizations means the largest loan.
10. Assumable – Yes, HUD Multifamily Loans are assumable for a ½ point fee. The buyer of your property just has to qualify under the same qualifications that you did.
Disadvantages of HUD Multifamily loans
Now that you have looked at some of the advantages, be sure to look at the Disadvantages of HUD Multifamily Loans. Number one is the time they take to close. We are talking about 7 months for acquisition and refinance, and 9 – 10 months for new construction. So, these loans are just not user friendly for purchases. Often, we have to close purchases with a temporary bridge loan and then refinance with a HUD 223(f) Loan. But if you are investing for the long buck – in other words you plan to keep the property for a while, it is well worth the time.
Click on this link If you want to learn just about everything about HUD Multifamily Loans.
And here’s a HUD Multifamily Loan Glossary with 74 terms defined for a fast look up.