What is Underwriting?
Underwriting is the process through which a lender determines if a borrower meets certain parameters. Underwriters mainly look at three C’s - credit, capacity and collateral. When it comes to HUD 221(d)(4) loans, potential borrowers must have excellent credit, as defined by their personal and business credit scores, as well as have a good borrowing capacity, as defined by their property’s DSCR.
What is Subsidized Affordable Housing?
Subsidized affordable housing is housing where residents receive rent assistance, but must pay at least 30% of their income for their rent and utilities. Examples include Section 8 Public Housing, Homeless Project-Based Units and HOPWA Facility-Based Housing.
What is Single Room Occupancy (SRO) Housing?
Housing consisting of single room dwelling units that are the occupants’ primary residences. HUD requires new construction, conversion of non-residential space and reconstruction SRO units to have either food preparation areas or bathrooms (or both).
What is Substantial Renovation?
As defined by HUD, substantial rehabilitation of HUD-assisted multifamily rental housing occurs when either the required repairs, replacements, and improvements involve the replacement of two or more major building components, or, when the cost of the repairs exceeds certain other thresholds.
What is Sponsor's Profit and Risk Allowance (SPRA)?
Sponsor’s Profit and Risk Allowance, or SPRA, is no more than 10% of the total estimated cost of: architect's fees, carrying and financing charges, legal, organizational, and audit expenses. In contrast to Builder-Sponsor’s Profit and Risk Allowance (BSPRA), SPRA is used when there is no identity of interest between the mortgagor and general contractor.
What is a Recourse Loan?
If a loan is recourse, and a borrower fails to repay it, the lender can go after both the collateral as well as the borrower’s assets which were not used as collateral. In comparison, if a loan is non-recourse, a lender is not permitted to seize a borrower’s non-collateral assets.
What is a Pro Forma?
Pro forma is a method of calculating financial results which emphasizes current or projected figures. Pro forma financial statements are commonly used to determine the potential viability of a real estate investment, as well as to show potential investors who may be interested in putting money into a project.
What are Seismic Reports?
Seismic reports assess the seismic risk (probability of an earthquake) of a particular property. These reports may include calculations of the PML (Probable Maximum Loss) and/or the SML (Scenario Expected Loss) based on projections consistent with current building codes.
What are Multifamily Rentals?
Multifamily rentals, also referred to multi-dwelling units (MDUs) are separate housing units contained in a single building or several buildings. Some examples include duplexes, triplexes, and apartment buildings. Another common example is a mixed-use building, which combines residential and commercial spaces in one structure.
What is Prepayment?
Prepayment occurs when a borrower pays off the balance of a loan before it matures. Prepaying FHA multifamily construction loans requires prior approval by HUD. Prepayment also typically requires that a borrower pay a specific prepayment penalty to their lender in order to compensate them for their financial loss.
What are Replacement Reserves?
Replacement reserves consist of money set aside to replace building equipment and components which wear out over time. All HUD multifamily loans require replacement reserves, but these requirements vary with different loan types.
What is a Non-Recourse Loan?
If a loan is non-recourse, a lender can take possession of assets used as collateral to secure the loan. However, unlike a recourse loan, if money is still owed after selling the collateral, with a non-recourse loan, the lender cannot go after the borrower’s other assets or garnish wages. The lender must accept the loss.
What are Rental Assistance Properties?
A rental assistance property is a property where low-income or very low-income tenants can qualify to receive monthly assistance. The most common rental assistance program offered by HUD is the Section 8 program, which offers vouchers to low-income tenants that will typically pay for a portion of their rent, and provides corresponding subsidies to property owners
What is the Low Income Housing Tax Credit (LIHTC) Program?
The Low Income Housing Tax Credit (LIHTC) program is a tax incentive designed to increase low-income housing availability. This tax credit can be claimed by developer-owners of LIHTC properties on their federal income taxes for up to ten years after the property’s completion and leasing up. The tax credit is available as long as the property adheres to LIHTC requirements.
What is Loan-to-Cost Ratio (LTC)?
Loan-to-cost ratio, or LTC, compares a project’s financing to the cost of construction. Along with loan-to-value ratio, or LTV, LTC is one of the most important metrics that lenders look at when deciding whether to approve a HUD multifamily construction loan, like the HUD 221(d)(4) loan.
What is FHA Mortgage Insurance?
FHA mortgage insurance protects lenders against loan default and allows them to bear less risk. If a borrower defaults on a loan, the FHA pays claims based on requirements established by FHA.
What is a HUD-Approved Lender?
A HUD-approved lender is a lender which has been approved by HUD to offer HUD 221(d)(4) and other FHA-insured home loans. Not every lender is HUD approved to make these loans.
What are Fixed Rate Mortgages?
Fixed-rate mortgages are real estate loans which require monthly payments at a fixed interest rate. All HUD multifamily loans, including HUD 221(d)(4) loans and HUD 223(f) loans, are fixed-rate mortgages. In contrast, HUD-insured loans for single-family loans are typically offered in both fixed and adjustable-rate options.
What is Low-to-Moderate Income Housing?
Low-to-moderate income housing is housing designed for individuals and families whose incomes are low to moderate in comparison to prevailing incomes where they live. In general, offering low-to-moderate income housing is a requirement for a property owner’s participation in the HUD Section 8 program.
What is the Department of Housing and Urban Development (HUD)?
HUD, or the U.S. Department of Housing and Urban Development, is a U.S. government agency that operates in the Executive Cabinet. The agency was founded by President Lyndon Johnson in 1965, as part of his "Great Society" program. HUD develops and executes policies on housing, including insuring HUD multifamily construction loans, specifically with a view towards affordability and sustainability.
What is a HUD-Held Loan?
A HUD-held loan is a formerly FHA-insured loan that is now owned by HUD. This usually occurs when a borrower has foreclosed on the loan and the title has been transferred to HUD.
What is Leverage?
Leverage is an investment strategy using borrowed money to finance assets and increase returns. It can also refer to the amount of debt used in financing an asset.
What is MIP (Mortgage Insurance Premium)?
A HUD mortgage insurance premium, or MIP, is paid annually, beginning at closing for each year of construction and then annually.
What is an Interest-Only Fixed Rate Loan?
An interest-only fixed-rate loan is a fixed-rate mortgage which the borrowers pays only interest and nothing towards the principal. When it comes to HUD 221(d)(4) loans, interest-only fixed-rate loans are offered during an up to 3-year period during the construction or substantial rehabilitation of a property.
What is Multifamily Accelerated Processing (MAP)?
MAP or Multifamily Accelerated Processing, is a system that establishes national standards for approved lenders to prepare, process and submit loan applications for FHA/HUD multifamily construction financing.
What are Government National Mortgage Association (GNMA) Mortgage Backed Securities?
GNMA securities are issued by Ginnie Mae (Government National Mortgage Association - GNMA) which insures payment from approved loan issuers on qualifying loans (like HUD 221(d)(4) loans). Ginnie Mae does not issue, sell or buy pass-through mortgage-backed securities. It also does not purchase mortgage loans.
What is Market Rate Housing?
Market rate housing consists of non-subsidized properties that are rented or owned by those who pay market rate rents or who paid market value to purchase the property. This is in contrast to both affordable housing and subsidized affordable housing, as both of these types of housing types confer special benefits upon HUD 221(d)(4) loan borrowers.
What are FHA-Insured Loans?
FHA mortgage insurance protects lenders against loan default and allows them to bear less risk. If a borrower defaults on a loan, the FHA pays claims based on requirements established by FHA.
What are Elderly Developments?
Elderly developments, also known as independent living facilities, are properties designed for the elderly that may not contain services associated with retirement centers such as central kitchens and dining areas, and other non-shelter spaces. With HUD 221(d)(4) financed projects, no non-shelter services is a mandatory condition for occupancy.
What Is DSCR (Debt Service Coverage Ratio)?
DSCR, or debt service coverage ratio, is a measurement of a property’s cash flow compared to the amount of money needed to pay current debts like interest, principal, and lease payments. DSCR is one of the most important metrics used by lenders to determine an income generating property’s eligibility for a loan.
What are Fair Market Rents (FMRs)?
Fair Market Rents (FMRs) are defined as rents in middle of the price range for a specific local market. FMRs are used by HUD to set maximum rents for certain programs.
What is the Fair Housing Act?
The Fair Housing Act (Title VIII of the Civil Rights Act of 1968) prevents discrimination on the basis of race, color, ethnicity, national origin, religion, gender, familial status, or disability during the home buying process. The Fair Housing Act is enforced by HUD’s Office of Fair Housing and Equal Opportunity (FHEO.)
What is an Engineering Report?
An engineering report is one of the required third-party reports for HUD 221(d)(4) loans. To create an engineering report, an engineer and other specialists assess a property’s physical conditions and risks that may affect the property’s soundness and value. The report may include issues or flaws associated with the property.
What is the FHA (Federal Housing Administration)?
Created in 1934 by the National Housing Act, the FHA was set up to promote home construction and reduce unemployment. The FHA also operates a variety of loan insurance programs, like the FHA 221(d)(4) program that this website focuses on. Although the FHA insures lenders, it makes no loans and builds no properties.
What is Escrow?
Escrow is when a third party holds assets (money, funds, securities) on behalf of two other parties until a transaction is completed. HUD 221(d)(4) escrow requirements include specific percentages of the loan amount to be set aside in order to guard against financial risk.
What is Builder and Sponsor’s Profit and Risk Allowance (BSPRA)?
For HUD 221(d)(4) loans, Builder and Sponsor’s Profit and Risk Allowance (BSPRA) consists of an allowance of 10% of the estimated project cost. Since the mortgage calculation contains no builder profit, this allowance is used as a credit to the builder.
What is an Appraisal?
An appraisal is the process of estimating the market value of a property. Appraisals for HUD 221(d)(4) loans can only be made by trained, authorized appraisers.
What is an Affordable Property?
Affordable properties are those that have rents set at a rate that is considered affordable for low-to-moderate and low-income residents. These include properties constructed using tax subsidies to provide below-market rents for low-income people, seniors and/or individuals with disabilities.
What is the Davis-Bacon Act?
The Davis-Bacon Act of 1931, usually known as Davis-Bacon, established a requirement to pay local prevailing wages for public works projects. HUD’s Office of Labor Relations oversees Davis-Bacon compliance which is required by many HUD programs.
What is Assumability?
If a loan is assumable, it can be transferred to a new owner along with the property. All FHA multifamily loans are fully assumable, subject to FHA approval along with a fee of 0.05% of the original loan amount.
What is an Architectural Report?
A report describing a property’s existing condition and code compliance. This includes the condition of the building, the site and the property’s systems. Most FHA 221(d)(4) architectural reports contain written descriptions and photographs which chronicle the onsite building inspection as well as relevant building codes and zoning ordinances.
What is Cooperative Housing?
A housing cooperative is a membership-based cooperative or corporation which owns real estate. It typically consists of one or more residential buildings. Cooperative Housing is a type of housing tenure, or the right to live in a certain residence.
What is Amortization?
Amortization is the process of paying off debt over a period of time on a fixed schedule in regular installments. For amortized loans, a large portion of the early monthly payments go toward interest. HUD multifamily loans, including the HUD 221(d)(4) loan and the HUD 223(f) loan, are fully amortizing.
What are Basis Points?
Basis points are a common measurement to denote changes in interest rates and other financial percentages. 1% change = 100 basis points, and 0.01% = 1 basis point.