Is a HUD Loan Right for Your Multifamily Development?
By Brett Hedrick
Change is an inevitable constant. The most relevant example of change came via the COVID-19 pandemic that disrupted our previous way of living, and still continues to do so. Companies, including BRC, were tasked with creating innovative solutions to adapt to this new business environment and determine the appropriateness of relief that resulted from the CARES Act. Similar to the aforementioned federal programs, refinancing your current loan may, too, be a worthwhile business decision that was not previously considered.
Why should I consider a HUD-insured loan?
Unlike their private lender counterparts, multifamily HUD mortgages grant lower interest rates due to the entire balance of the loan being backed by federal government guarantees. These guarantees also allow for HUD loans to have maturity dates that exceed 35 years with fixed interest rate terms. This option gives companies stable long-term debt that can be fully amortized with no balloon payment at the maturity date.
A common misconception of HUD insured multifamily loans is that they are only available to affordable housing properties. However, the Federal Housing Administration (FHA) offers an expansive list of non-recourse programs for affordable and private sector, as well as non-profit and for-profit projects alike. HUD programs like 223(f) and 221(d)(4) are some of the more common funding sources for acquisition, rehabilitation, or refinancing activities.
As a result of the COVID-19 pandemic, the Federal Reserve dropped the federal funds rate to 0%, resulting in lower interest rates offered by lenders to incentivize activity. As of April 2021, this rate has remained unchanged1. The federal rates could begin to rise again as the national economy continues to recover, so it could be very beneficial to lock in a lower fixed interest rate now.
Things to consider
The loan application process is not an expedient one, often lasting five to nine months2. Therefore, companies with time-sensitive cash flow requirements may need to consider other lender options. Additionally, HUD loans come with a variety of compliance requirements that must be met under the terms of the mortgage and regulatory agreements. Annual HUD inspections, financial statement audits and establishing and maintaining replacement reserve funding are just a few of the common obligations.
If you have any questions or if you are interested in exploring this option, your trusted advisor can help determine if refinancing using HUD-insured loans is right for you.