What is an FHA Apartment Loan under HUD?
Published 09-28-2018


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 Requirements

Property TypeConventional ApartmentsLow Income HousingManufactured HousingCooperative HousingSeniors HousingSpecial Needs/Handicapped Housing
Units5+ units
OccupancyN/A for new construction; 85%+ economic occupancy for existing properties
LocationAnywhere in the US
Loan Amount$1,000,000* – No Max
FinancialsStable NOI for existing properties; less important for substantial rehab/construction loans
Leases12 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.

Borrower Requirements

ExperienceExtensive experience required; prior ownership/management of FHA properties preferred
Net WorthNo required minimum
LiquidityNo required minimum
CreditNo recent bankruptcies, foreclosures, short sales, etc.
Legal StructureSingle-Purpose Entity (SPE)

Underwriting Requirements

Maximum LTV/LTC83.3% – conventional properties85% – affordable housing87% – properties with 90%+ rental assistance
Term Length10-35 years (existing properties)40 years (new construction)
Maximum Amortization35 years (existing properties)40 years (new construction)
Minimum DSCR1.11x – 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 YieldN/A
Required ReportsAppraisalEnvironmental ReportStructural Engineering / Physicial Condition & Needs Asssement (PCNA)Seismic Zoning (if in vicinity of fault line)ALTA Survey

FHA Apartment Loan Features / Characteristics

RecourseNon-recourse, except standard “bad boy” carveouts
Interest-Only PeriodNot available for pre-existing buildings; available during construction period on new buildings
Prepayment Penalty10-1% declining (lighter prepayment penalties can be negotiated for a fee)
Loan AssumptionAvailable with pre-approval and assumption fee
Loan ServicerOriginator, or may be transferred to a third party
Cash lock-boxYes
Secondary FinancingYes, through FHA’s Supplemental Loan Program
Insurance & Tax ReserveAlways required
Capital ReservesAlways 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

Pre-Closing/Funding Process

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.

Post-Closing/Servicing

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

Special Needs

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About the Author

Leanne 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.