Written by Fernando Martin| September 28, 2018
In addition to its healthcare and special needs programs, the Federal Housing Authority (FHA) branch of the US Department of Housing and Urban Development (HUD) offers government guarantees on various types of multifamily mortgages through its Office of Multifamily Housing Programs. These loans are available for conventional apartments, low-income housing, manufactured housing communities, cooperative housing, and seniors housing. This type of loan is only for very seasoned commercial real estate investor/owners because of the extensive paperwork, reporting, reserves, and experience requirements.
| Property Type | Conventional Apartments Cooperative Housing Special Needs/Handicapped Housing |
| Units | 5+ units |
| Occupancy | N/A for new construction; 85%+ economic occupancy for existing properties |
| Location | Anywhere in the US |
| Loan Amount | $1,000,000* – No Max |
| Financials | Stable NOI for existing properties; less important for substantial rehab/construction loans |
| Leases | 12 month leases |
* Although $1 million is technically the minimum some lenders will underwrite at, we only recommend FHA apartment loans in excess of $5,000,000 unless being done as part of a larger portfolio finance because of the fees and extensive paperwork.
| Experience | Extensive experience required; prior ownership/management of FHA properties preferred |
| Net Worth | No required minimum |
| Liquidity | No required minimum |
| Credit | No recent bankruptcies, foreclosures, short sales, etc. |
| Legal Structure | Single-Purpose Entity (SPE) |
| Maximum LTV/LTC | 83.3% – conventional properties85% – affordable housing87% – properties with 90%+ rental assistance |
| Term Length | 10-35 years (existing properties)40 years (new construction) |
| Maximum Amortization | 35 years (existing properties)40 years (new construction) |
| Minimum DSCR | 1.11x – Section 202 & 208 or projects with 90%+ rental assistance1.15x – Affordable Housing1.176x – Conventional properties or Tax Credit projects without a significant rent advantage |
| Minimum Debt Yield | N/A |
| Required Reports | AppraisalEnvironmental ReportStructural Engineering / Physicial Condition & Needs Asssement (PCNA)Seismic Zoning (if in vicinity of fault line)ALTA Survey |
| Recourse | Non-recourse, except standard “bad boy” carveouts |
| Interest-Only Period | Not available for pre-existing buildings; available during construction period on new buildings |
| Prepayment Penalty | 10-1% declining (lighter prepayment penalties can be negotiated for a fee) |
| Loan Assumption | Available with pre-approval and assumption fee |
| Loan Servicer | Originator, or may be transferred to a third party |
| Cash lock-box | Yes |
| Secondary Financing | Yes, through FHA’s Supplemental Loan Program |
| Insurance & Tax Reserve | Always required |
| Capital Reserves | Always required; amount depends on the results of the Physical Condition and Needs Assessment (PCNA) |
FHA Apartment Loans are priced based on the corresponding treasury and a spread, which takes into account the loan amount, term, LTV, and lender yield requirements. Pricing considerations the borrower should be aware of are the following:
The FHA Apartment Loan application process (whether for construction financing or financing for existing properties) is quite tedious. Because it is a government-guaranteed program at high leverage, the underwriting and due diligence requirements are extensive to make sure the property serves the community, the borrower has enough experience, and the government is protected from potential losses. However, for the right investor, this is a great product because of the very long fixed terms and low interest rates.
FHA Apartment Loans are typically serviced by the originator/underwriter, but may be transferred to third parties.
Standard FHA Apartment Loan Insurance Origination
Special Needs
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