Do HUD/FHA 221(d)(4) loans qualify for Ginnie Mae securities?
The Government National Mortgage Association, otherwise known as Ginnie Mae, issues mortgage-backed securities, which are "backed by the full credit and faith of the U.S. government." These are based on FHA loans, which include HUD/FHA 221(d)(4) loans, as well as loans issued by the Department of Veterans Affairs (VA).
HUD/FHA 221(d)(4) Loans and Ginnie Mae Securities
The Government National Mortgage Association, otherwise known as Ginnie Mae, issues mortgage-backed securities which are "backed by the full credit and faith of the U.S. government." These are based on loans including a variety of FHA multifamily loans. These include FHA multifamily construction loans, like the HUD 221(d)(4) loan, as well as loans issued by the Department of Veterans Affairs (VA).
What is GNMA?
In 1968, HUD set up the Government National Mortgage Association (GNMA or Ginnie Mae) to promote home ownership in the US. In general, Ginnie Mae has several major functions:
Guarantees timely payment of principal and interest payments on residential MBS (mortgage-backed security) instruments to institutional investors
Guarantees securities backed by single-family and multifamily loans insured by government agencies (FHA, VA, HUD’s Office of Public and Indian Housing, and the Department of Agriculture’s Rural Development)
Originate or purchase mortgage loans
Purchase, sell, or issue securities
Use derivatives to hedge
Carry long-term debt or other outstanding securities liabilities
What are the requirements for a HUD/FHA 221(d)(4) loan?
The HUD/FHA 221(d)(4) loan has several requirements, including a full scope of third party reports (environmental assessment, market study, appraisal, etc.), annual review, and compliance with Davis Bacon wage requirements. The borrower must also have a maximum Loan-to-Value (LTV) ratio of 85% for market-rate properties, 87% for affordable properties, and 90% for properties with 90% or more low-income units. Additionally, the borrower must have a bonded, licensed, and insured general contractor execute a GMP contract.
What are the benefits of a HUD/FHA 221(d)(4) loan?
The HUD/FHA 221(d)(4) loan offers an incredible opportunity for multifamily investors and developers to access the industry’s longest-term form of fixed-rate construction and substantial rehabilitation financing. With terms of up to 40 years (43 years with the 3-year construction period), these loans are also non-recourse, fully assumable, and offer high leverage.
In general, it’s extremely difficult for investors and developers to find financing that will cover both the construction and post-construction period for a multifamily property, all in one loan. This is especially the case since Fannie Mae and Freddie Mac do not provide financing for the construction of multifamily properties, only for property rehab, acquisition, and refinancing (and certain combinations thereof).
In most cases, multifamily investors and developers will have to take out an more expensive bank loan, which will only permit up to 75% LTC in most cases. After, they’ll need to refinance into a permanent loan, which will often come in the form of CMBS financing, Freddie Mac, Fannie Mae, or even a HUD multifamily refinancing loan, such as the HUD 223(f) loan.
Having to deal multiple closings can be expensive, as appraisals, third-party reports, legal, and other costs will be repeated twice in the span of a year or two. To learn more about HUD multifamily loans, simply fill out the form below and a HUD lending expert will get in touch.
How does a HUD/FHA 221(d)(4) loan differ from other commercial real estate loans?
A HUD/FHA 221(d)(4) loan is a non-recourse, fixed-rate loan for the construction and rehabilitation of multifamily properties insured by HUD. It offers a 40-year amortization, not including the interest-only construction period which can last up to 3 years, making it the multifamily industry’s highest-leverage, lowest-cost, fixed-rate loan available. It focuses more on the value of a property than on the financials of an individual borrower, and offers significant incentives for affordable properties, including those that utilize HUD’s Section 8 rental assistance program, or the Low-Income Housing Tax Credit (LIHTC) program.
In comparison, most bank and life company loans have shorter loan terms, ranging from 5-10 years, and focus more on the financials of an individual borrower. Additionally, HUD 221(d)(4) loans are more costly to originate upfront and typically take longer to close than traditional loans.
What are the eligibility requirements for a HUD/FHA 221(d)(4) loan?
HUD/FHA 221(d)(4) borrowers should be structured as single-asset/single-purpose, bankruptcy-remote entities. These can be owned or operated by nonprofit or for-profit groups. In addition to this, HUD 221(d)(4) borrowers must have a maximum Loan-to-Value (LTV) ratio of:
- 85% for market-rate properties
- 87% for affordable properties
- 90% for properties with 90% or more low-income units
They must also have a bonded, licensed, and insured general contractor execute a GMP contract. For more information, please visit What Types of Borrowers are Eligible for HUD/FHA 221(d)(4) Loans? and HUD Multifamily Construction Financing.
What are the advantages of a HUD/FHA 221(d)(4) loan for a borrower?
The HUD/FHA 221(d)(4) loan offers a number of advantages for borrowers, including:
- Non-recourse financing
- High leverage of up to 90% of the total project cost
- Fixed-rate financing for up to 40 years (43 years with the 3-year construction period)
- Fully assumable loan
- No need to refinance after construction is complete
These benefits make the HUD/FHA 221(d)(4) loan an attractive option for multifamily investors and developers who are looking for long-term, fixed-rate financing for their projects. To learn more about HUD multifamily loans, simply fill out the form at www.hud.loans/hud-loans-blog/hud-221d4-benefits and a HUD lending expert will get in touch.
Do HUD/FHA 221(d)(4) loans qualify for Ginnie Mae securities?
Yes, HUD/FHA 221(d)(4) loans qualify for Ginnie Mae securities. According to HUD221D4.loan, the Government National Mortgage Association (GNMA or Ginnie Mae) was set up by HUD in 1968 to promote home ownership in the US. Ginnie Mae guarantees timely payment of principal and interest payments on residential MBS (mortgage-backed security) instruments to institutional investors, and guarantees securities backed by single-family and multifamily loans insured by government agencies (FHA, VA, HUD’s Office of Public and Indian Housing, and the Department of Agriculture’s Rural Development).
Additionally, Ginnie Mae does not:
What are Mortgage-Backed Securities?
Mortgage-backed securities (MBS) like Ginnie Mae bonds, are an investment in a pool of mortgage loans. These are bought by investors, who receive a certain amount of the principal and interest throughout the life of the bond, in this case, usually around 30 years. They also take on a certain degree of risk, even though the investment is backed by the U.S. government. Right now, investors can buy Ginnie Mae bonds in minimum $25,000 denominations.