What is the Federal Housing Administration?
The Federal Housing Administration, generally known as "FHA", provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 47.5 million properties since its inception in 1934. Although the FHA is now a subsidiary of HUD, it is responsible for the overall management and administration of HUD's Multifamily Housing Programs. HUD, however, ultimately provides the insurance.
HUD oversees the FHA, the largest mortgage insurer in the world. While most of us associate FHA insurance with home loans, HUD also provides FHA insured loans for the purchase and refinancing (HUD/FHA 223(f) program), construction and substantial rehab of apartments (HUD/FHA 221(d)(4) program), assisted living facilities, skilled care nursing homes and critical access hospitals (HUD/FHA 232, 232/223(f) program and HUD 241(a) program).
HUD Multifamily Loan Programs & HUD Healthcare Loan Programs
HUD FHA insured mortgages play an important role in providing liquidity to the multifamily and healthcare communities. Because the mortgages are insured by the FHA, HUD approved lenders are able to assume a greater level of risk and provide borrowers with the lowest rates and offer the longest fixed rate, fully amortized loans in the multifamily and healthcare lending industry.
All mortgages are approved by HUD and insured by the Federal Housing Administration (FHA). Mortgages are underwritten and processed through Multifamily Accelerated Processing (MAP) approved lenders and funded through the issuance of GNMA Mortgage Backed Securities. Ginnie Mae guarantees investors (security holders) the timely payment of principal and interest on securities issued by private lenders that are backed by pools of Federal Housing Administration (FHA). The full faith and credit guarantee of the U.S. Government that Ginnie Mae places on mortgage-backed securities lowers the cost of, and maintains the supply of, mortgage financing for government-backed loans.
All HUD/FHA loan programs are non-recourse (except standard carve-outs) and rates are very competitive. HUD/FHA 223(f) and HUD/FHA 232/223(f) mortgage programs allows for long-term mortgages with up to 35-year fixed rate loan terms for purchases and refinances, and up to 40-year fixed terms for HUD/FHA 232 and HUD/FHA 221(d)(4) new construction loans.
To qualify for the HUD/FHA 223(f) program for the purchase or refinance of multifamily apartments, the property must contain at least 5 residential units with complete kitchens and baths and have been completed or substantially rehabilitated for at least 3 years prior to the date of the application for mortgage insurance.
The Benefits of Refinancing
With interest rates near record lows, the multifamily housing and healthcare real estate markets are in the midst of a refinancing boom. Because HUD/FHA lending programs are insured by the federal government, the reduced risk allows HUD approved lenders to offer interest rates that are below the market average. This results in a greater debt-service savings than other multifamily and healthcare lending program alternatives. Long term owners and investors can maximize their Net Operating Income (NOI), and have comfort knowing that they will have a fixed mortgage interest expense in cycles of rising interest rates.
Over the last few years, investors and owners of multifamily and healthcare properties have been able to refinance their debt by refinancing their current loans with fixed rates near 4%. LSG Lending Advisors recently provided a client with a term sheet from a HUD approved lender that will reduce their existing interest rate by over 2%, provide them over $2,000,000 in cash out, and still reduce the principal and interest payments that they are currently paying with their current lender.
Evaluating the Prepayment Penalty
Many lending programs carry significant prepayment penalties that can discourage borrowers from attempting to lower their interest rates by refinancing. Fannie Mae and Freddie Mac have yield maintenance prepayment penalty structures, which in the event that the borrower pays off a loan before maturity, allows the lender to attain the same yield as if the borrower had made all scheduled mortgage payments until maturity. Yield maintenance premiums are designed to make lenders indifferent to an early prepayment by a borrower. Yield Maintenance allows the bond investors to maintain the same yield as if the borrower made all scheduled mortgage payments until maturity. If your existing loan is close to maturity, absorbing a prepayment penalty with a reduced rate can still provide a project with debt service savings through a HUD/FHA 223(f) refinance.
Borrowers need to take into consideration the prepayment penalty amount prior to engaging in a refinance and LSG Lending Advisors can provide an analysis that includes the cost of the prepayment penalty absorbed into the new loan amount. Waiting until the loan matures may be risky for several reasons. Interest rates could rise significantly by the time the loan matures, and owners could end up paying a higher interest rate when refinancing their balloon payment. Market values decrease, contracting economic cycles, and a tightening of mortgage lending standards can make it difficult to refinance at the time the loan matures and the balloon payment comes due.
The HUD/FHA 223(f) program allows up to 80% LTV cash out equity of the property’s appraised value. This program allows for 85% LTV for market rate refinances with no cash out as well. Refinancing a property with a 10% or greater rental component may qualify for up to 87% LTV, and increases to 90% LTV for properties with 90% or greater rental assistance.
While HUD/FHA financing can be a reliable and beneficial form of financing for owners and developers of multifamily and healthcare properties, transactions typically take longer than other financing program options.
Learn more about the variety of HUD Loan options here.
LSG Lending Advisors has the experience to help guide you through the process.