In 2020, the U.S. Department of Housing and Urban Development (HUD) experienced a record level of mortgage applications, insuring over $26 billion in multifamily financing. HUD’s multifamily programs are widely used by both market-rate and affordable owners and developers, who are attracted, in particular, to the HUD refinance program due to its low interest rate, long amortization period (35 years) and favorable leverage (80 to 85 percent).
While there are many benefits to the HUD refinance program, there are a few areas to understand before pursuing a multifamily HUD-Insured loan.
The ‘All-In’ Interest Rate
Interest rates on HUD loans are unquestionably low, with some approaching 2% towards the end of 2020, but borrowers need to know the whole story. The interest rate locked on the Ginnie Mae security, which is used to fund the loan, is only one part of the overall rate.
The second part of the “all-in” rate is the Mortgage Insurance Premium (MIP). The MIP for each individual loan ranges from 25 to 65 basis points, depending on how the property is classified. HUD has specific definitions for these classifications, which include: Market Rate, Broadly Affordable, Affordable, or Green/Energy Efficient.
It’s important to clearly communicate a comprehensive “all-in” rate, which should include a strong presentation of the MIP, what classification will fit for a property and why, as this is the basis of a HUD-insured loan’s required debt service. If a borrower is evaluating multiple debt options, this makes the comparison between a HUD rate and a conventional rate “apples to apples.”
To put it simply: Interest Rate + MIP = “All-In” Rate
Managing the Loan Process
From start to close, a HUD-insured loan can take many months to complete, and these timelines have only grown as demand for HUD-insured loans have increased. Because of this length of time, it is important to be properly organized and on schedule so that a loan application is as streamlined as possible.
A well-prepared HUD lender will be organized and communicate in advance if there are longer lead-time items that will be necessary for an application. Borrowers should also be sure to inquire about third-party inspections and scopes, current HUD review times, floodplain issues, age-related issues, and debt service thresholds, etc. Any impending loan maturities should also be communicated to the lender.
Advanced planning does not stop at closing either. Make sure other groups such as your auditor, building staff and energy consultants are arranged to help meet the management requirements of the loan after it has closed.
Ask for a Concept Meeting
HUD only requires concept meetings for New Construction or Substantial Rehabilitation transactions. Even though it is not required for refinance transactions, for a borrower’s first HUD transaction, a lender should request a concept meeting. A concept meeting can be very beneficial to first-time borrowers for many reasons.
- HUD can offer valuable feedback on the loan assumptions your lender has presented.
- Borrowers can experience what it is like to interact with HUD as a lending partner.
- A lender’s relationship with the HUD office will be apparent, giving a borrower a better sense of how the lender interacts with HUD’s production team and how well they know each other. A strong relationship between a lender and the HUD staff reviewing an application can be invaluable.
Transaction Costs
Compared to a conventional loan, a HUD-Insured loan application and closing may have higher costs and fees. These can vary depending on the age and condition of a property.
A thorough loan evaluation prepared by a lender should properly evaluate the scope of due diligence for a particular loan and estimate the associated costs, such as replacement reserves, to a high degree of accuracy. Being knowledgeable about what is required and when funds are due is helpful for budgeting and planning purposes.
It is fair to say that even the most efficiently processed HUD-insured loan may still be more cumbersome for an owner to complete than typical conventional financing, but proper coaching and planning can undoubtedly make the process easier for everyone involved and produce a successful outcome.