When Does An FHA Apartment Loan Make the Most Sense?

by admin

If you are looking for an apartment loan, you aren’t alone. Over $130 billion of apartment loans will be originated this year. Major apartment finance options include: FNMA/FHLMC, insured depository institutions (banks, thrifts and credit unions), life insurance companies (and some pension funds), Wall Street conduits and FHA. Each of these programs has its own strengths and weaknesses. Picking the right source of multifamily mortgage capital can ensure a smooth process versus a painful “round peg in square hole” exercise.

Here are some situations when you should consider an FHA apartment loan:

  • You Own an Affordable Rental Housing Project. HUD offers the most generous underwriting ratios for affordable housing projects. Cash-out up to 80% of value is allowed. Because of the time required to process an FHA transaction, very few acquisition transactions are financed with FHA. HUD has made the program more “bridge loan” friendly in recent years.
  • You are Responsible for Affordable Housing Preservation and New Construction. The FHA new construction/substantial rehabilitation loan is a construction loan that converts to a permanent loan. All interest rates are set at initial closing. The term of the permanent loan can be as long as 40 years. Affordable transactions can get up to 87% loan to cost with a 10% developer credit to equity in for-profit transactions.
  • You are looking to Do Market Rate New Construction. FHA new construction programs are popular for market rate projects. A significant portion of Rockhall’s closings in the past four years have been market rate new construction projects. A number of people on Rockhall’s origination and underwriting staff have years of new construction experience and can quickly assess the fit between your project and FHA. We recently closed a transaction where, due to the value of land contributed by the developer, there were no closing equity requirements.
  • You Already Have an FHA Loan. FHA offers a very attractive streamlined refinance program for projects already in the FHA portfolio. Fees are low and processing is a snap because typically no appraisal or environmental review is required. It is possible to use this program in an acquisition situation.
  • You Have a Section 202 Elderly and Handicapped Project. HUD is committed to lowering the debt service cost on its portfolio of Section 202 elderly and handicapped housing. FHA offers much more liberal valuation guidelines for Section 202 projects. If you have Section 202 projects you should be considering an FHA refinance.
  • Project in a Small Market. Other lending programs often will shy away from projects in less developed areas or require higher equity requirements. FHA does not do this. So, if other lenders have been less enthusiastic about your small market multifamily project, FHA might be a good choice.
  • You Aren’t Bullish on Long-Term Interest Rates. FHA offers competitively priced fixed rate fully-amortizing loans. The competition focuses on balloon mortgages that come due in ten years or less. If you want the option to refinance or not, then FHA may be for you.