Non-Recourse, Fixed Rate and Fully-Amortizing Apartment Loans From HUD
While it’s not exactly a secret, many apartment investors still don’t realize that the Federal Housing Administration (FHA), a government agency within the Department of Housing and Urban Development (HUD), offers some of the lowest-rate and longest-term apartment loans in the industry. In fact, the FHA’s flagship apartment construction loan, the HUD 221(d)(4), offers 40-year fixed-rate and fully amortizing loans to qualified borrowers. This type of non-recourse apartment financing also offers leverage up to 85% for market-rate properties and up to 90% for certain subsidized housing properties.
It’s important for borrowers to realize that HUD does not actually issue loans, it simply insures lenders against potential borrower defaults. So, in the case that a borrower does not pay back their loan, the lender can seek an insurance payout from HUD. That’s why borrowers are typically required to pay a one-time, upfront and annually recurring mortgage insurance premium (MIP).
In 2019, borrowers were provided a sizable $11.67 billion in HUD multifamily loans. That included $5.5 billion in 223(f) multifamily purchase and refinance loans; $5.1 billion in construction loans, including 221(d)(4) apartment construction loans and 232 senior housing / healthcare construction loans; $6.2 billion in HUD 221(d)(4) Multifamily Construction / Substantial Rehabilitation Loans; and $3.25 billion in projects utilizing the Low-Income Housing Tax Credit (LIHTC) program.
The LIHTC program offers apartment investors a dollar-for-dollar income tax credit in exchange for investing in properties that reserve a certain amount of project units for residents earning less than or equal to a certain percentage of the Area Median Income (AMI). The LIHTC program is sometimes, but not always, used in concert with properties utilizing the HUD Section 8 program. Section 8 allows local public housing authorities (PHAs) to distribute federal subsidies to approved landlords for housing pre-approved low-income tenants at a heavily discounted rate. HUD provides special benefits, like increased leverage, for multifamily borrowers who utilize either of these programs.
In addition to providing serious benefits for affordable housing investors, HUD apartment loans can also be great for those looking to invest in seniors or student housing. Borrowers can use a traditional 221(d)(4) loan to build an independent living facility and a 223(f) loan to acquire or refinance one. However, in order to develop other types of senior living properties, such as assisted living facilities or nursing homes, a borrower will need a 232 loan. Alternatively, borrowers can use the 232/223(f) loan program to acquire or refinance an existing assisted living facility, nursing home, memory care facility or intermediate care center.
Borrowers may use traditional 221(d)(4) and 223(f) loans for eligible student housing properties, albeit with certain restrictions. In particular, no more than one source of rent may be collected from each room—limiting residents' ability to live with roommates. In addition, rental rates must be comparable to other non-student apartment housing in the area. This means that HUD-financed student housing properties are likely only to work in areas where housing costs are already relatively reasonable.
It may also be of interest to note that FHA apartment loans are fully assumable with FHA and lender approval. In essence, when a borrower sells their property they can have the new buyer “assume” the remaining portion of the loan. Upon assumption of the loan, the previous borrower is no longer responsible for prepayment penalties and the new borrower can avoid paying most of the fees associated with loan origination. However, borrowers are stuck with the remaining loan amount, even if that provides far less leverage than they initially wanted.
For the right type of borrower, the HUD 221(d)(4) program is a dream come true. No other type of apartment loan on the market offers a 3-year interest-only construction loan, followed by a 40-year fixed-rate, fully-amortizing apartment loan. With most loans from banks, conduits and agency lenders ranging from 5-10 years, the HUD 221(d)(4) program allows investors to take advantage of today’s ultra-low interest rates and lock in pricing that’ll still be a good deal in the 2050s.
However, the HUD 221(d)(4) loan isn’t for everyone. It’s generally best for investors in secondary and tertiary markets who want to hold onto a property for a longer period of time. Borrowers in major Metropolitan Statistical Area (MSA) may find that banks and conduits lend more aggressively, making HUD comparatively less attractive. Likewise, borrowers wishing to sell a property within a few years may not want to deal with HUD prepayment penalties. Plus, as we just mentioned, HUD has somewhat stringent net worth and liquidity requirements for borrowers, so investors will need to meet these before getting approved.
If the HUD 221(d)(4) loan is the industry’s premier apartment construction financing product, the HUD 223(f) loan is certainly its counterpart when it comes to apartment purchases and refinances. Like the 221(d)(4), the 223(f) is generally best suited to financially strong borrowers in secondary or tertiary markets, particularly those utilizing a long-term holding strategy for their multifamily investments. HUD 223(f) loans provide fixed-rate, fully-amortizing loan terms up to 35 years, with LTVs up to 85% for market-rate properties, and up to 90% for certain subsidized housing properties.
As mentioned earlier, both 221(d)(4) and 223(f) loans can be used to finance independent living facilities and housing communities that generally accept residents between 55-62 and older but do not provide group dining facilities or in-house medical care.
America's population of senior citizens is growing quickly, with approximately 300,000 Americans turning 65 each month. While 65 may be the new 40, by the time someone reaches their 80s or 90s, they often find that they need more assistance with daily living than their families or a home healthcare service can handle. So they move into seniors housing; typically, an assisted living facility or if their medical needs are more significant, a nursing home.
In cases where Alzheimer's or Dementia may be an issue, an individual may reside in a specialized memory care facility, while if they’re recovering from a serious injury, they may stay at an intermediate care facility for a period of weeks or months. Each of these types of housing provides a valuable service to residents and can be a viable opportunity for the right investor. This is particularly true if they have a good source of financing, such as a HUD 232 loan.
232 loans are designed to finance the construction and substantial rehabilitation of senior living and healthcare facilities. In many ways, they’re quite similar to 221(d)(4) loans. Borrowers can still get non-recourse 40-year fixed-rate and fully-amortizing financing (following a 3-year interest-only construction loan) while benefiting from high-leverage and HUD’s ultra-low interest rates.
Like its sibling the HUD 232 loan, HUD 232/223(f) is designed to finance senior living and healthcare facilities, including nursing homes, assisted living centers and memory care facilities. However, unlike traditional 232 loans, the 232/223(f) is used for purchases and refinances, not construction and rehabilitation. In some ways, it’s similar to the HUD 223(f) program for apartment financing, as it allows for 35-year terms. However, DSCR requirements and required third-party reports are more comparable to the HUD 232.
If you already have an FHA apartment loan, but you want to refinance it for a lower interest rate or a longer term, the HUD 223(a)(7) program could be the perfect fit. It’s by far the easiest HUD multifamily loan to apply for, as it only requires one third-party report, i.e. a project capital needs assessment, and can close in as little as two months.
The HUD 241(a) program allows current HUD apartment loan borrowers to gain access to supplemental financing in order to make eligible property improvements. These can include making fire safety or energy efficiency building upgrades, such as purchasing and installing energy-efficient insulation or a new building sprinkler system. Like other types of FHA apartment loans, HUD 241(a) loans have highly competitive interest rates, have fixed interest rates and are fully-amortizing and non-recourse. Terms generally must be the same as the current HUD loan but can be extended up to 40 years if there are fewer than 25 years remaining on the original loan’s term.