At Record-Level Volumes in 2020, Multifamily HUD Lending Has Its Day

August 31, 2020

The preconceived notion that HUD loans are reserved for single-family or affordable housing has often discouraged commercial property investors from exploring this permanent financing option, when HUD actually insures billions in loans for multifamily properties annually. So far in HUD’s 2019-2020 fiscal year, the agency has backed over $18 billion in loans.

We sat down with Eric Rosenstock, a Managing Director at Greystone, who shared some of the attractive, and yet largely unknown, advantages of HUD-insured multifamily permanent loans.

“The lending landscape today – a result of the volatile economic environment we’re experiencing – has really shown why the HUD product is weatherproof,” Eric notes. “While some other lending sources have retreated, such as banks and bridge lines, HUD is still a winning option with the same loan-to-value ratios as pre-COVID, some of the longest loan terms offered, and fixed rates at some of the lowest interest rates we’ve ever seen.”

Eric answers some frequently asked questions on multifamily HUD-insured loans below:

What type of commercial properties qualify for HUD financing?

HUD insures loans for all types of multifamily housing, whether it is Market Rate, Affordable / Low Income Housing Tax Credit (LIHTC) properties, age-restricted communities, or Section 8 HAP contract deals.  

What are the advantages of HUD over some other lending options?

For starters, Greystone’s HUD loans are all fixed rate, non-recourse, and typically some of the lowest interest rates available today. HUD loans are fully assumable for a nominal fee of 5 basis points plus some small lender fee, and are self-amortizing loans with no balloons, and loan terms of typically 35-40 years.

You might want to consider exploring HUD when:

  1. You are seeking the highest possible leverage;
  2. Seeking cash-out when refinancing;
  3. Have a medium- to long-term hold horizon;
  4. You may not qualify for bank or other loans due insufficient Net Worth/Liquidity requirements;
  5. Want to mitigate interest rate risk; and/or
  6. Seek the lowest cost of capital.

What are HUD’s lending parameters?

HUD divides their lending parameters into three buckets:

  1. For Market Rate deals, 85% LTV for acquisitions or 80% LTV for Cash-Outs and underwritten using a debt coverage ratio (DCR) of 1.18x;
  2. For Affordable Housing deals, 87% LTV for acquisitions or 80% LTV for Cash-Outs and underwritten using a DCR of 1.15x; and
  3. For Subsidized deals, 90% LTV for acquisitions or 80% LTV for Cash-Outs and underwritten using a DCR of 1.11x.

What are the advantages that a group like yours brings over other HUD lenders?

Greystone has been a leading lender for HUD-insured loans over many years. So far in HUD’s 2019-2020 fiscal year (which end September 30th), Greystone has originated over $2.6 billion in FHA loans for multifamily and healthcare properties, representing 14.7% in market share.

Why is this the case? I believe that if a group wants to be proficient and efficient in HUD lending, it requires them to truly dedicate their career to understanding every complexity and nuance within HUD’s MAP guide, enabling them to draw out a preliminary trajectory transaction landscape and see it through to the finish line. HUD is a unique breed of financing product and one that the most experienced HUD producers create a true material difference from the others, hence the large differential in historical production volume.

What is the process of obtaining a HUD loan?

Typically, it takes 30 to 60 days for Greystone to underwrite the proposed loan, obtain 3rd party reports (Appraisal, Phase I and PCNA), and submit the application. From there, HUD then has a target of 60 days to issue a “Firm Commitment,” and Closing occurs 30-45 days thereafter.

The entire process can take 3-6 months, but if a lender comes to the table very prepared, it can be done in 30 days.  

What are the prepayment penalties associated with a HUD loan?

HUD loans usually come with a 10-year step-down prepayment structure (i.e. 10, 9, 8, 7, 6, 5, 4, 3, 2, 1). However, you can tailor your prepayment structure based upon your business plan or hold period. So, if you are planning on selling the asset in five years, you can structure a five-year call protection, whereas, on other lending platforms, this could incur additional basis points.