What is an FHA Apartment Loan under HUD?
FHA Apartment Loan Definition
In addition to its healthcare and special needs programs, the Federal Housing Authority (FHA) branch of the US Department of Housing and Urban Development (HUD) offers government guarantees on various types of multifamily mortgages through its Office of Multifamily Housing Programs. These loans are available for conventional apartments, low-income housing, manufactured housing communities, cooperative housing, and seniors housing. This type of loan is only for very seasoned commercial real estate investor/owners because of the extensive paperwork, reporting, reserves, and experience requirements.
|Property Type||Conventional ApartmentsLow Income HousingManufactured HousingCooperative HousingSeniors HousingSpecial Needs/Handicapped Housing|
|Occupancy||N/A for new construction; 85%+ economic occupancy for existing properties|
|Location||Anywhere in the US|
|Loan Amount||$1,000,000* – No Max|
|Financials||Stable NOI for existing properties; less important for substantial rehab/construction loans|
|Leases||12 month leases|
* Although $1 million is technically the minimum some lenders will underwrite at, we only recommend FHA apartment loans in excess of $5,000,000 unless being done as part of a larger portfolio finance because of the fees and extensive paperwork.
|Experience||Extensive experience required; prior ownership/management of FHA properties preferred|
|Net Worth||No required minimum|
|Liquidity||No required minimum|
|Credit||No recent bankruptcies, foreclosures, short sales, etc.|
|Legal Structure||Single-Purpose Entity (SPE)|
|Maximum LTV/LTC||83.3% – conventional properties85% – affordable housing87% – properties with 90%+ rental assistance|
|Term Length||10-35 years (existing properties)40 years (new construction)|
|Maximum Amortization||35 years (existing properties)40 years (new construction)|
|Minimum DSCR||1.11x – Section 202 & 208 or projects with 90%+ rental assistance1.15x – Affordable Housing1.176x – Conventional properties or Tax Credit projects without a significant rent advantage|
|Minimum Debt Yield||N/A|
|Required Reports||AppraisalEnvironmental ReportStructural Engineering / Physicial Condition & Needs Asssement (PCNA)Seismic Zoning (if in vicinity of fault line)ALTA Survey|
FHA Apartment Loan Features / Characteristics
|Recourse||Non-recourse, except standard “bad boy” carveouts|
|Interest-Only Period||Not available for pre-existing buildings; available during construction period on new buildings|
|Prepayment Penalty||10-1% declining (lighter prepayment penalties can be negotiated for a fee)|
|Loan Assumption||Available with pre-approval and assumption fee|
|Loan Servicer||Originator, or may be transferred to a third party|
|Secondary Financing||Yes, through FHA’s Supplemental Loan Program|
|Insurance & Tax Reserve||Always required|
|Capital Reserves||Always required; amount depends on the results of the Physical Condition and Needs Assessment (PCNA)|
FHA Apartment Loan Pricing
FHA Apartment Loans are priced based on the corresponding treasury and a spread, which takes into account the loan amount, term, LTV, and lender yield requirements. Pricing considerations the borrower should be aware of are the following:
- The rate fluctuates until closing and typically cannot be locked until FHA gives a preliminary “nod” of approval
- Both the current treasury index and corresponding spreads affect the rate
The FHA Apartment Loan application process (whether for construction financing or financing for existing properties) is quite tedious. Because it is a government-guaranteed program at high leverage, the underwriting and due diligence requirements are extensive to make sure the property serves the community, the borrower has enough experience, and the government is protected from potential losses. However, for the right investor, this is a great product because of the very long fixed terms and low interest rates.
FHA Apartment Loans are typically serviced by the originator/underwriter, but may be transferred to third parties.
FHA Apartment Loan Programs
Standard FHA Apartment Loan Insurance Origination
- New Construction for Rental and Cooperative Housing: Section 221(d)(4)
- Purchase or Refinancing of Existing Multifamily Housing Projects: Section 223(f)
- Supplemental Loan Insurance for Multifamily Rental Housing: Section 241(a)
- Qualified Participating Entities Risk-Sharing Program: Section 542(b)
- Housing Finance Agency Risk-Sharing Program: Section 542(c)
- Rental Housing for the Elderly: Section 231 (Rarely used)
- Cooperative Units: Section 213 (Rarely used)
- Rental Housing for Urban Renewal and Concentrated Development Areas: Section 220 (Rarely Used)
- Single Room Occupancy (SRO) Projects: Section 221(d)(4) (Rarely Used)
- Mortgage Insurance for Construction or Substantial Rehabilitation of Condominium Projects: Section 234(d) (No longer used)
- Rental Housing : Section 207 (No longer used)
- Manufactured Home Parks : Section 207 (No longer used)
- Supportive Housing for the Elderly: Section 202
- Supportive Housing for Persons with Disabilities: Section 811
- Assisted-Living Conversion Program (ALCP)
- Demonstration Program for Elderly Housing for Intergenerational Families
- Emergency Capital Repair Program (ECRP)
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About the AuthorLeanne Eicoff
Leanne is a JD/MBA and works as a Managing Director for Commercial Loan Direct, specializing in large balance transactions, portfolio loans, and complex financing structures. When not negotiating the best deals for her clients, you can find Leanne in the yoga studio or snowboarding up in the Rockies.