Why Lower Fixed-Rate HUD Loans Are In Demand

September 12, 2023

Why Lower Fixed-Rate HUD Loans Are In Demand

With today’s higher interest rate environment, HUD multifamily loans are even more attractive when everyone is focused on how to manage borrowing costs.

“When you compare the first eight months of 2023 to the same period in 2022, our HUD loan volume is up 50%,” says Nikhil Kanodia, executive vice president and head of Greystone’s FHA lending group. “Generally, HUD loans are more popular because of their favorable terms and borrowers looking to refinance out of their high-cost floating rate loan into a low fixed rate alternative.”

HUD Loan Benefits
HUD loans, also referred to as FHA loans, are especially enticing for developers of new apartments because they offer a construction-to-permanent loan with fixed rates and at a far higher loan-to-cost compared to banks and other alternative construction lending sources.

“The fixed rates for Section 221(d)(4) loans are priced low and remain fixed for 40 years plus the construction period,” Kanodia says. “Many borrowers expected rates to come down this year but have experienced the opposite. Some are now thinking, ‘who knows where rates will be when we’ve finished construction and need to refinance into a permanent loan?’ That’s driving a lot of the demand, because developers like the idea of taking refinance risk off the table when construction is complete.”

For acquisitions, Greystone has a unique bridge-to-HUD program the allows qualified borrowers to close quickly and cost-efficiently.

“When a borrower can’t wait four to six months for their HUD loan, we offer a bridge loan that’s priced efficiently without double dipping of fees and costs,” Kanodia says. “This allows a borrower to seamlessly close on acquisitions and transfer into a HUD loan.”

Interest Rate Reduction Option
Refinance applications for the Section FHA 223(f) program have also increased over the past 90 days because they offer a long-term fixed rate with a flexible prepay structure.
An important benefit of an FHA loan is that borrowers can take advantage of interest rate reductions if rates do decline in the near future.

“Borrowers never have to feel ‘locked in’ because HUD offers two programs to reduce their interest rate should they go down,” Kanodia says.

Both programs can be used to reduce their in-place HUD interest rate without the expense of an entirely new refinancing. There’s no fee to take advantage of a rate reduction and borrowers do not have to come out of pocket to pay any of the prepayment premium. The only cost is related legal paperwork to close, Kanodia says.

“The Section 223(a)(7) program allows you to reduce your interest rate and to extend your loan back to the original loan amount and to the original term,” Kanodia says. “You can use the proceeds to repair or renovate the property. For example, if you had the loan for four years, you could reset the balance to your original amount and extend the loan back to 35 years instead of 31, which helps with cash flow.”

The HUD Interest Rate Reduction (IRR) program offers a streamlined process of less than one month, but it doesn’t include a loan term extension or resetting the loan to the original balance, Kanodia says. That program may be best for recently completed loans that would get less of a benefit from resetting to the original loan terms.

HUD Multifamily Loan Improvements
One reason some multifamily developers avoided FHA loans in the past was the reputation that getting from application to closing took too long. Kanodia says that HUD and Greystone have taken steps to significantly improve the process.

“A big change in FHA financing is that there’s no longer a long queue to get an approval,” Kanodia says. “In 2020 it took months to even get a file reviewed and now we can generally get a commitment from HUD within 60 days.”

Greystone, the largest HUD lender in the country, typically can put together a HUD application within 30 to 45 days.

“We have strong relationships with every HUD regional office, and we know what they want from borrowers,” Kanodia says. “The entire process can take as little as 90 days from the time we start packaging the loan application and getting a HUD approval.”

Faster loan approvals can be especially valuable for lease-up deals, Kanodia says.

“When projects are at 40% to 50% occupancy and will take a few months to stabilize, that’s a good time to start the HUD process,” Kanodia says. “Then they can generally time it to have three or four months to complete the HUD process plus a 60-day rate lock.” Under recently changed HUD rules, applications can now be made to HUD after just one month of stabilization and third-party reports can be prepared in anticipation of that time.

For peace of mind, some borrowers choose an early rate lock even before they have a HUD commitment, he says.

HUD announced in June 2023 that their large loan limit increased from $75 million to $120 million.
“This opens the window for larger transactions and offers a more favorable loan-to-value ratio,” Kanodia says.

Kanodia anticipates that demand for FHA loans will continue to be strong for at least the next six to 12 months or longer, especially if interest rates continue to stay high or increase.