Multifamily Projects Could Be Eligible for Better Financing Sooner
By Heidi Nietert
Recently, the U.S. Department of Housing and Urban Development (HUD) terminated something big, and this is great news for self-directed investors interested in multifamily housing investments.
Usually when HUD ends a loan program, it means fewer opportunities for investors rather than more of them. In this case, however, this “termination” was only partial, and it has created massive opportunities in the multifamily housing space for investors working with HUD lenders to fund small and large multifamily properties.
What HUD Decided to Let Go
During the housing crash and subsequent Great Recession, HUD enacted a number of measures to try to make sure Americans would continue to have access to affordable housing. Part of these efforts included bolstering lending on existing multifamily rental housing as small as five residential units, although many of these developments were much, much bigger.
That part of the HUD lending program was (and remains) Section 223(f), and it provides long-term mortgages (up to 35 years) financed with Government National Mortgage Association (GNMA or Ginnie Mae) mortgage-backed securities. However, Section 223(f) left out something crucial, mainly because it was simply not all that relevant at the time because there was a surplus of housing on the market rather than a dearth. 223(f) previously only facilitated the purchase or refinancing of existing multifamily housing. New construction was ineligible and so were buildings requiring “substantial rehabilitation.”
A Big Termination with Positive Results
Still wondering what that “termination” was that means so much in the multifamily space? Well, recently, HUD lifted what is known as the “Three-Year Rule,” which defined existing properties as those that had been in existence for three years or more. Now, you can refinance a 223(f) loan if your newly built multifamily property meets all the other criteria of this HUD program.
“This is great news for investors with capital in new multifamily construction or who have done a complete overhaul of an existing multifamily development because properties that are fully rehabbed and stabilized sooner than expected are now eligible under the new policy,” explained Judah Rosenberg, vice president at leading top HUD multifamily and healthcare lender Greystone & Co.
Because 223(f) loans are not available on properties that require “substantial rehabilitation,” this means that an investor who completes a total rehab, places tenants, and meets certain debt service coverage ratio (DSCR) requirements will not have to wait three years to take advantage of 223(f) loans anymore. They can refinance into long-term, advantageous HUD loans as soon as their properties are performing!
Heidi Nietert is the founder and CEO of consulting firm Knowledge Pop, a company that helps with business, financial, and entrepreneurial development as well as corporate project management in the U.S. and abroad. She has served on the Board of Directors of the British American Business Council and was elected to a four-year term as president and chairman of that entity in 2010. Learn more about creative ways to use HUD financing in your investments by emailing Heidi@KnowledgePop.com.
SIDEBAR: An Overview of HUD Rates & Terms
The latest HUD decision around 223(f) is exciting, but many self-directed investors do not realize that HUD loans are extremely favorable on both relatively small and extremely large projects of all types. Here is a breakdown of the terms on a HUD 223(f) Permanent Loan:
- 80 percent loan-to-value
- 35-year term
- 35-year amortization
- Rates below 3 percent (at time of publication)
- Negotiable 10-year stepdown prepay
- Same terms across all markets