FHA Multifamily Housing – A Step-by-Step Guide to Financing
June 20, 2020
The Federal Housing Administration (FHA), part of the US Department of Housing and Urban Development (HUD), guarantees loans for multifamily properties. These are multi-tenant properties with five or more units. An FHA multifamily loan can finance new construction, acquisitions, major renovations and refinances. An FHA multifamily loan may also apply to medical facilities, co-ops, senior housing and special needs housing.
In this article, we will not go over an exhaustive description of every FHA multifamily home loan program available. We will likely focus on Section 223(f) mortgage insurance for the purchase or refinance of an existing multifamily rental property. We emphasize the steps required to obtain an FHA Section 223(f) multifamily home loan.
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Description of the section 223(f) program.
FHA or conventional lenders could initially finance Section 223(f) projects. This section excludes facilities requiring significant rehabilitation. HUD is likely to require that critical repairs be completed before investors can apply for multifamily housing loans guaranteed by Section 223(f). However, borrowers can complete non-critical repairs after FHA approves mortgage insurance.
As you will learn, the purpose of Section 223(f) is to ensure that lenders do not suffer a loss if a borrower defaults on an FHA condominium loan. The program guarantees mortgage loans for up to 35 years. The National Mortgage Association’s (Ginnie Mae) government mortgage-backed securities finance these mortgages, providing liquidity and lowering interest rates.
General characteristic
In addition, the FHA Section 223(f) program has the following characteristics:
- Includes Refi FHA 202 program refinancing.
- You can use it to purchase or refinance an existing multifamily property.
- Rates are at historic lows and LTVs are high.
- FHA multifamily loans are accepted and self-amortizing.
- You save money because of lower annual debt service.
- Your realized/repaid capital at refinancing.
- You can include eligible refinance costs, including prepayment penalties, in your FHA multihome loan.
- Assists you in extending tenant services and making necessary improvements/repairs.
- You may direct the proceeds of the payment to other HUD rental assistance housing facilities for seniors.
Only HUD-approved lenders can qualify for FHA-insured mortgage loans. The maximum loan-to-value ratios after renovations for FHA Section 223(f) multifamily loans are:
- 87.0% for projects receiving 90% or more rental assistance
- 85.0% for affordable housing projects
- 83.3% – for market projects
Section 223(f) of the FHA Multifamily Loan Guidelines
The following guidelines apply to FHA Section 223(f) multifamily loans.
Relevant properties
- The property must have five or more residential units (5+) with full baths and kitchens.
- Completion or rehabilitation of the property at least three years before borrowers can apply.
- Applicants must complete non-critical repairs within 12 months of closing on the FHA multifamily loan.
- Projects cover market-rate rental housing or rental assistance (tenant-based or project-based).
- Commercial space cannot exceed 25% of gross income and 20% of net rentable space
- Excludes student housing with a room for rent, not an apartment.
- The minimum rental period is 30 days.
- The section excludes projects that need significant rehabilitation, including the replacement of two or more major systems.
- Repair costs cannot exceed 15% of the loan value after repairs or a maximum of $6,500 per unit (except in high-cost areas).
- The project must have an economic life long enough to allow for a 10-year mortgage.
- Davies Bacon wage requirements do not apply to section 223(f) projects.
Acceptable borrowers
- Both non-commercial and commercial borrowers can apply.
- All tenants may occupy approved projects within normal occupancy.
Cash-out refinancing
- Allowed if 80% of value exceeds existing debt plus transaction costs.
- Only 50% of net cash is released at closing.
- The remainder is held until non-critical repairs are completed, inspected and approved.
Fees and expenses
- Third Party Reports: Flood certificateassessment, environmental analysis, engineering report.
- FHA Inspection Fee: 1% of the repair cost or $30 per unit if the repair cost is less than $3,000 per unit.
- FHA Exam Fee: $30 per $10,000 FHA Home Loan Balance.
- Funding Fee: 1% – 3% depending on the complexity and size of the loan.
- Permanent accommodation fee: 1% – 2%.
- First Year Mortgage Insurance Premium: 0.25% – 0.35% of the loan amount for affordable real estate and 1% for market rate.
- Monthly mortgage insurance premium: 0.25% – 0.35% of the loan amount for affordable real estate and 0.60% for market rate.
- Legal issues of the borrower: approximately: $10,000 – $20,000.
- Title and entry fees: We will decide.
|
Depreciation |
Up to 35 years |
|
Current rate |
Below 4.0% for a 35-year loan |
|
Confiscations |
Tax, replacement reserve, initial reserve deposit, repairs and insurance. |
|
Calculation of interest |
Actual/360 or 30/360 |
|
Interest only available? |
N/A |
|
Loan size |
$1 million and above |
|
Term of the loan |
Less than 75% of the estimated life of the physical improvements or 35 years |
|
Maximum loan-to-value ratio |
83.3% to 87.0% |
|
Minimum debt service coverage ratio |
1.15 to 1.17 |
|
Minimum occupancy |
Stable employment for at least six months prior to application and maintained until closing |
|
Prepayment penalty |
Typically a two-year lock-in followed by a downward premium |
|
Rate the locks |
Under obligations |
|
Bid type |
Corrected |
|
Regression/non-regression |
Without dealing with standard allocations |
|
Need replacement spares? |
yes |
|
Extra credit? |
Available 12 months after closing, subject to loan agreement |
|
Great? |
yes |
|
Is subordinated debt allowed? |
Up to 7.5% in exceptional cases |
FHA financing process
The procedures are different for Multifamily Expedited Processing (MAP) and non-MAP lenders.
Expedited Processing Apartment Building Lenders
- The borrower applies to an approved MAP lender who provides the necessary evidence for a firm commitment application.
- These exhibits include a complete underwriting package for consideration at a local program center or multifamily center.
- The Program Center or Multifamily Hub analyzes the application to decide whether the risks associated with the loan are acceptable. Considerations include borrower capabilities and market needs.
- The FHA underwriter must conclude that the project will generate sufficient income to repay the loan. Underwriters must estimate all necessary project costs.
- For an approved loan guarantee, the local program center or apartment center undertakes to insure the mortgage for the lender.
Non-MAP Lenders
- HUD field office staff process applications from non-MAP lenders in accordance with Traditional Application Processing (TAP) rules. TAP has two stages of processing: a contingent commitment stage and a firm commitment stage.
- The borrower must attend a pre-application conference at the contingent commitment stage. The conference determines the appraised value and the maximum amount of the mortgage.
- At the firm commitment stage, the local HUD Program Center or Multifamily Hub decides on the available mortgage amount.
- If the loan qualifies for the FHA program, the local program center or apartment center commits to the lender to insure the mortgage.
Are these loans right for me?
To understand whether a Section 223(f) loan is right for you, consider the following pros and cons:
Pluses
- Section 223(f) loans offer long-term, fixed-rate financing for the purchase or renovation of qualifying real estate.
- Low interest rates fueled by Ginnie Mae securitizations.
- Highest LTV on the market.
- Non-recourse loans.
- Loans are possible.
- There are no restrictions on geography or population.
- Additional funding is available.
- The maximum required capital is only 15% and only 10%.
Cons
- The process can take a long time and require a lot of paperwork.
- You must provide audited operating reports annually
- Fees can be high.
- You may need to pay your mortgage insurance premiums.
- You must reserve a security deposit.
- Property must pass HUD inspection.
- The mortgage must not exceed FHA multifamily loan limits
- Distribution owner restrictions apply.
- The maximum amount of refinancing is 80%.
Frequently asked questions
How do I qualify for an FHA condominium loan?
Generally, you need to demonstrate verifiable income sufficient to pay for your home and existing debt. You’ll also need to save at least 3.5% for a down payment. It helps to have an established credit history with a score of at least 680. Mortgage must not exceed FHA multifamily loan limits.
How Many FHA Home Loans Can I Get?
You can usually only have one property that you finance through FHA. However, you may qualify for an exemption that will allow you to receive multiple credits.
How long does FHA financing for condominiums take?
Generally, you should expect it to take 45 to 60 days to apply for an FHA multihome loan with HUD. It would then take another two to three months for HUD to commit and up to 45 days to close. So the total time will probably take 4.5 months to close.
