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What Is AMI?
Area Median Income, often shortened to AMI, is a metric that represents the median income in a defined region. AMI is calculated each year by the Department of Housing and Urban Development (HUD) on the basis of household size for every metropolitan area and region in the U.S. Area median income is sometimes referred to as MFI, or Median Family Income, when provided for a four-person household. HUD publishes both the most recent as well as the historical MFI calculations on the HUD User web portal.
The AMI calculation is most commonly used for assessing affordable housing eligibility. Most affordable housing programs require that the income of a prospective tenant falls below a specified percentage of AMI in order for them to be eligible to lease a unit. AMI requirements such as these are generally mandatory to take advantage of low-income housing tax credits, or LIHTC.
Area median income is also essential for forecasting rental income. In most cases, affordable housing rents are locked to no more than 30% of a household’s monthly income, though occasionally this may be higher.
AMI and Section 8 Housing
As we mentioned earlier, AMI plays a large role in affordable housing. In relation to HUD’s Section 8 program, public housing authorities require strict adherence to three specific tiers of renters based on income:
- Low Income (calculated as a maximum 80% of AMI)
- Very Low Income (at or below 50% of AMI)
- Extremely Low Income (at or below 30% of AMI)
HUD sets income limits to determine eligibility not only for Section 8 project-based and Section 8 Housing Choice Voucher programs — but also for public housing, Section 202 housing for the elderly, and Section 811 housing for persons with disabilities programs. These income limits are based on AMI estimates in conjunction with Fair Market Rents.
What is the maximum AMI for apartment loans?
The maximum AMI for apartment loans depends on the specific area and the percentage of AMI that is considered acceptable to qualify for an affordable or low-income designation. According to HUD 221(d)(4) Loans, market rate properties are allowed a maximum 85% LTV, affordable properties are allowed a 87% LTV, and properties with 90% or more low-income units are allowed a maximum 90% LTV. Additionally, according to Multifamily and Apartment Loans from $100K to $1M, loan sizes range from $100,000 and up, credit scores from 580 and up, LTVs up to 80%, terms up to 10 years or more fixed, and amortizations up to 30 years with interest-only options. Non-recourse loans are available for multifamily loans over $750K.
What are the eligibility requirements for apartment loans based on AMI?
The eligibility requirements for apartment loans based on AMI depend on the program. For example, if your property benefits under the Low-Income Housing Tax Credits (LIHTC) program, generally eligibility is set at a percentage of AMI, usually less than 100%. For housing under HUD’s Section 8 program, eligibility is determined by three rigid tiers of renters by income: Low Income (at or below 80% of AMI), Very Low Income (at or below 50% of AMI), and Extremely Low Income (at or below 30% of AMI).
To see the median family income or AMI for an area, visit HUD’s data service which provides data annually, typically in the second quarter of the year.
Depending on the amount of affordable or low-income units your development has, you may be subject to different loan-to-value (LTV) ratio requirements for a HUD 221(d)(4) loan. For example, market rate properties are allowed a maximum 85% LTV, affordable properties are allowed a 87% LTV, and properties with 90% or more low-income units are allowed a maximum 90% LTV.
To determine what "affordable" or "low-income" is in your specific area, you'll need to determine both the AMI for that area and the specific percentage of AMI that's considered acceptable to qualify for an affordable or low-income designation.
How does AMI affect the interest rate of an apartment loan?
AMI does not directly affect the interest rate of an apartment loan. However, it is important to know the AMI for the area in which your property is located when applying for a HUD 223(f) loan, as it will help you calculate the maximum amount of rent that you can charge tenants. This will allow you to make accurate financial projections regarding your potential investment. Source
What are the advantages of using AMI to qualify for an apartment loan?
Using Area Median Income (AMI) to qualify for an apartment loan can be beneficial for multifamily investors. AMI can help you calculate the maximum amount of rent that you can charge tenants, allowing you to make accurate financial projections regarding your potential investment. Additionally, AMI is used to calculate the maximum rent that can be charged under the HUD Section 8 program, which pays rental assistance subsidies to landlords. This can be a great way to keep your property affordable and attract tenants.
For more information on AMI and HUD 223(f) loans, please visit https://www.hud223f.loans/hud-223f-faqs/area-median-income. For more information on AMI and HUD 221(d)(4) loans, please visit https://hud221d4.loan/hud-221-d4-faqs/ami-area-median-income.
What are the disadvantages of using AMI to qualify for an apartment loan?
AMI stands for Area Median Income, which is used to qualify for an apartment loan. The disadvantages of using AMI to qualify for an apartment loan include:
- Stricter down payment, income verification and credit score requirements.
- Sometimes requires some sort of recourse for borrower.
- Often shorter amortizations and shorter fixed periods than CMBS and agency loans.
- Stricter with cash out refinances.
- Not serviced by initial CMBS lender.
- Strict enforcement of prepayment penalties.
- Higher closing costs.
- Dishonest tranche ratings can have serious negative effects for borrowers and investors.
- Less autonomy in the operation of the property and limited flexibility to deviate from the terms of the loan documents.
- Difficulty in releasing collateral.
- Expensive to exit.
- Lock outs often prevent prepayment or up to two years.
- Reserves required.
- Secondary financing (i.e. mezzanine debt or preferred equity) not always allowed.