FHA Loan Information
Below you will find information on our FHA Loans and documentation with more details regarding the specific programs. Use the tiles below to navigate to the desired section.
Explanation of BSPRA – the “Developer’s fee”
BSPRA (Builder Sponsor Profit Risk Allowance)
BSPRA is paper equity. A BSPRA allowance of up to 10% of all hard and soft costs combined is added to those costs to arrive at the total estimated replacement cost of the property. Land is excluded from the total project cost for the BSRPA calculation (The BSPRA allowance could be any amount up to 10% but is always the full 10% in practice.) The maximum mortgage by the cost test is then 90% of the replacement cost. In a simplistic example, let’s say that for every $60 in hard costs, there were $30 in soft costs. So the total of the two would be $90 and the allowable BSPRA $9. Then say the land value is $1. The total replacement cost is $100 ($60 + $30 + $9 + $1) and the maximum mortgage $90. If the general contractor and developer agreed not to take any part of the BSPRA in cash, but to leave it in the deal, then they can fully mortgage out their hard and soft costs. If the land owner is also in the deal, which sometimes happens, the project can be built with no upfront cash equity requirement.
Here is HUD’s definition of BSPRA: “A. Builder’s and Sponsor’s Profit and Risk Allowance (BSPRA). An amount included in replacement cost for profit motivated and limited distribution mortgagors where an identity of interest (See paragraph 4-9) exists between the mortgagor and general contractor. BSPRA is no more than 10 percent of the total estimated cost of: on-site land improvements; structures; general requirements; general overhead expenses; architect’s fees; carrying and financing charges; and legal, organizational and audit expenses.” In order for the BSPRA allowance to be used, there must be a recognizable identity of interest between the general contractor and the owner/developer. And here is HUD’s description of what constitutes an identity of interest:
'4-9. IDENTITY OF INTEREST. An identity of interest exists if:
The mortgagor (or any general or limited partner, shareholder, director, officer, employee or authorized representative of the mortgagor) has a financial interest in or contractual arrangement with the contractor regarding the project, including site procurement, other than the construction contract or vice versa.
Any general or limited partner, shareholder, director, officer, employee or authorized representative of the mortgagor is also a general or limited partner, shareholder, director, officer, employee or authorized representative of the contractor or vice versa.
The contractor advances funds for any obligation of the mortgagor, including site procurement, or pays on behalf of the mortgagor (or provides without cost) architectural or engineering services, except those permitted by the construction contract or owner-architect agreement.
The mortgagor (or any general. or limited partner, shareholder, director, officer, employee or authorized representative of the mortgagor) can directly or through one or more intermediaries control or influence the decisions or policies of the contractor, including apparent control or influence over the decisions or policies, or vice versa. “Apparent control or influence” means any relationship that exists between the mortgagor and contractor (or any general or limited partner, shareholder, director, officer, employee or authorized representative of the mortgagor and contractor) by blood or marriage.
The mortgagor and contractor at any time enter into any agreement, contract or undertaking that changes or cancels any obligation of the other party that is required by the documents executed at initial endorsement.” In cases where a identity of interest does not already exist, the most common way of establishing the identity of interest is “B” above. The general practice is to give the contractor (or one of its principals) a non-controlling minority interest in the ownership entity (5%-25%), which is then bought out at the end of construction and final endorsement by the payment of a fixed price (the builder’s profit). If BSPRA is used, then no Builder’s Profit is included in the construction contract and the contract cannot be of the “fixed price” type but must be of the “cost plus a fixed fee” type. Builder’s Overhead (2%) is permitted to be included in the contract in BSPRA cases. If no identity of interest exists or is created as described above, then the builder’s profit is included in the contract and must be met with upfront equity. The contract may then be of the fixed price type.
The developer may only receive a SPRA allowance as paper equity. SPRA is equal to 10% of the soft costs only. Here is HUD’s definition of SPRA:
Sponsor’s Profit and Risk Allowance (SPRA). An amount included in replacement cost where no identity of interest (see paragraph 4-9) exists between the general contractor and mortgagor. SPRA is no more than 10 percent of the total estimated cost of: architect’s fee; carrying and financing charges; and legal, organizational and audit expenses.” In our simplistic example above, this is what happens. Hard costs equal $60 and a builder’s profit of say 10% is added to those costs. Soft costs equal $30 and a SPRA of $3 is permitted. Land is still $1. So, total replacement cost is the same ($60 + $6 + $30 + $3 + $1 = $100) and maximum mortgage is still the same at $90. But the builder’s profit is not now paper equity; it’s real cash equity. The developer has got to put up the $6 before first mortgage proceeds are released. Furthermore, it is unusual for HUD to allow a 10% builder’s profit in non-identity of interest cases. Most I’ve ever seen is about 8%. So what would really happen to our simplistic example is this: $60 + $4.80 + $30 + $3 + $1 = $98.80 and the maximum mortgage is $88.92.
So, even if the land owner still chucks in his buck, the mortgagor has to come up with $5.88 in real hard cash at the initial closing. This way both developer and general contractor lose.
Health Care property loan terms specified by FHA
1.HUD Exam Fee:
This is an application fee to HUD when everything is completely processed and the final package goes in for the application for mortgage insurance. It is 3/10 of 1% of the mortgage amount.
2. Allowable FHA finance fee (the points):
It is the 2.00% finance fee HUD allows us. We can’t charge more than this.
3. Estimated 3rd party reports:
These are an appraisal, engineering review, feasibility study and a phase I. Except for the Phase I, the others are by HUD approved companies that act as if they are a HUD employees. They are awarded that status and have received some HUD training. We are doing the processing and HUD becomes a review agency.
4. GNMA security fee of 1.5%:
This is like a bond fee we are allowed that covers the costs of placing the loan, also called a placement fee. GNMA securities are issued loan by loan which is what makes it all work. It turns the mortgage transaction into a Triple A rated bond transaction or security.
5. Est. Borrower organizational:
This is an estimate of your costs to set up the organization you are using as the borrower, i.e. LLC, trust, Corporation etc.
6. Cost Cert./Constr. Audit:
At the end of construction you would hire a CPA to certify that all the costs went into the property. Once this is accepted is when it becomes a permanent mortgage and
when the 40 years starts.
7. What is BSPRA?:
This is like a “developers fee”. It is approximately 10% of all the costs except the land or property value.
8. The basic qualifiers for the underwriting process:
We look at mostly the feasibility study and then at the builder and borrower to make sure they are qualified. There is no minimum credit score or equity required
Pre-Application architectural requirements for FHA loans
Pre-Application Architectural Requirements
The architectural requirements for a Pre-Application package may vary depending on the office and current changes. We offer the following as a general guide for developers to understand the process. Architects should consult the proper HUD handbooks.
The architectural handbook and other requirements are found at HUD.gov. The MAP guide will give the requirements and more specific URL’s for any required handbooks.
In general a pre-application will require:
Sketch plan of the site showing overall dimensions of main building(s), major site elements, e.g. water, sewer, electric, gas in the streets adjacent to the site. Contour lines and elevations are not required in the sketch site plan.
Sketch plans of main building(s) must show overall dimensions of:
Sketch plan dimensions must be sufficient to allow the HUD architectural analyst to calculate the Gross Floor Area for the entire project and the Net Rentable Areas for all the apartment units in the project.
This information should be obtained at the following link: http://www.hud.gov/offices/hsg/mfh/map/mapguide/mapguide.cfm Form AIA 305A is the required form for both the architect and contractor.
a. Typical floor plan showing apartment types and placement;
b. ground floor plans showing common areas;
c. Sketch floor plans of typical dwelling units(s);
d. Typical wall section(s) showing footing, foundation, wall and floor structure. Notes must indicate basic materials in structure, floor and exterior.
How FHA Refi/Acquisition loans work
Explanation Refinance/Acquisition – MAP Loans
The FHA/HUD refinance/acquisition program is designed for apartments of more than 5 units. It is conventional financing. FHA insures our mortgages and this results in favorable terms and low rates. Subsidy requirements, affordable housing percentages, and low/middle income requirements for tenants do not apply. The program allows for upscale projects with pools, tennis courts, etc. as long as the costs are supported by market rents and market expenses.
The basics are a fixed rate (no balloon) thirty-five-year permanent mortgage based on the lesser of 80% LTV (cash out for a refinance) or 83.3% LTV or cost (for acquisition or rate and term refinance). Loans are underwritten to a minimum 1:20 Debt Service Coverage Ratio. A seller second promissory note of up to 7.5% of cost/value is also allowed on acquisitions.
The FHA Insurance Process:
Upon receipt of the signed agreement, we will send you a list of additional information needed for the review by HUD. We will package the additional information and send it for final credit committee review. Third party Appraisal, Engineering and a Phase I Environmental Reports are required for the submission.
Up Front Costs
Packaging Fee (refunded at closing) $5,000
Phase I $2,000 estimated
Appraisal $5,500 estimated
Engineering $3,000 - $10,000 estimated
Exam Fee to HUD 3/10th of 1% of mortgage (or $3.00/thousand)
Additional costs that you may incur include survey, title, legal expenses (borrower legal NOT lender legal), and other fees that may be charged by municipalities, sellers etc.
Feasibility study for health care only $10,000 estimated
Good Faith deposit (locks the rate and is paid two to four weeks before the closing) ½ to 1% of mortgage -Always Refunded at closing
Mortgage Insurance Premium (MIP) 90 basis points of mortgage, paid out of proceeds of mortgage at closing. Funds the insurance program, which makes this program possible.
All costs are financeable if they are determined to be reasonable. (e.g.: Your attorney’s fees of $15,000 to handle the closing may be reasonable. Attorney’s fees of $200,000 on a two million dollar loan would not).For more detailed information, please review the 223f program at multifamily programs on the WEB at www.HUD.gov
How FHA New Construction/Substantial Rehab Loans Work
Explanation New Construction – MAP Loans
The FHA/HUD new construction/substantial rehabilitation program is designed for apartments and health care facilities and is a conventional loan. FHA insures the mortgage and this results in favorable terms and low rates. Subsidy requirements, affordable housing percentages, and low/middle income requirements for tenants do not apply. The program allows for upscale projects with pools, tennis courts, etc. as long as market rents and market expenses support the costs.
The terms are a fixed rate (no balloon) construction loan based on 83.3% of costs, and a 1:20 Debt Service Coverage Ratio (Utilizing 83.3% of NOI). When final construction numbers are accepted, the loan rolls into a 40 year fixed rate permanent at the same rate. Many transactions allow a credit for appreciated land value. This calculation uses value estimates from an appraiser for the intended use of the land as of the closing date. In turn, this may allow loan sizes to climb to more than 100% of total project “costs”. The construction mortgage and the permanent are both non-recourse and always assumable (not just “one time” assumptions). The forty-year amortization period starts when construction is completed and it becomes a permanent mortgage. The program also allows for a 10% Builder’s Sponsor’s Profit Risk Allowance (BSPRA) for apartments. This is similar to a developer fee that is based on all the hard and soft costs except the land and comes through the builder.
The FHA Insurance Process
Step 1: Finance Agreement
The finance agreement is our authorization to speak to HUD, local officials and others in order to complete due diligence efforts on your behalf. There is a packaging Fee $15,000 (refunded at closing) We visit the site, borrower, architect and other parties such as management agent, contractor etc. Should you find better financing before we start processing $5,000 is refunded.
In cases for both apartments and health care projects, where we have market concerns or the borrower wants input as to what to build, we will have a market analysis performed by the contractor who will do the feasibility study to determine marketability of the development before funds are expended for detailed plans and specs. The study should show what to build, amenities, square footage, unit types etc. This report is internal and HUD never sees it unless we want to provide it as back up.
Step 2: Pre-Application Conference
Documents are assembled including floor plans, site plans and resumes of the team and submitted to HUD for a pre-construction conference that may be in person or by telephone. This meeting is with HUD staff, the borrower and any members of his team. If the office feels an application is warranted, they invite a submission for the pre-application.
Step 3: Pre-Application Submission
The pre-application includes a phase I which the borrower can obtain in, and a third party feasibility study ordered by the MAP underwriter. The feasibility analyst is approved by and may have been trained by HUD. He/she takes what is being built and plugs it into the market to determine rents, absorption rates, operating deficit, operating expenses, vacancy rates and other data. Renderings, floor plans, site plans and other data are submitted with this application. A typical list of architectural requirements can be found here: https://www.trustlender.com/pdf/PreApplicationArchitecturalRequirements.pdf No real engineering costs as these are the basic conceptual plans only. Your architect will know what these consist of and costs vary at this stage. Other costs would be the environmental estimated $2,000-$3,000, and half of the application fee to HUD. The application fee is 0.3% or 3/10ths of 1% of the mortgage amount. Half the fee is 0.15% or 15 basis points. The feasibility Study & limited appraisal estimated $8,500-$10,000. Submission of the pre-app package is made to HUD only after all the pre-application documents are complete. After review of the entire package and a possible site visit, HUD issues an invitation letter. This letter has invites the firm submission and has the rents, operating expenses, absorption rate, operating deficit and other information that HUD agrees to underwrite the mortgage insurance to. If this letter is acceptable, we always have closed as the only missing item is the costs. Step 3 can take 1-2 months to complete the feasibility study and HUD may require 1-2 months to issue the invitation letter. HUD has 45 days to issue the invitation letter per the handbook
Step 4: Firm Submission
(This stage can no longer be submitted at the same time as STAGE I)
Additional costs that you may incur include architects, legal expenses, other fees that may be charged by municipalities, sellers etc. After all construction documents, borrower and management agent documents are received it is packaged and the required number of copies are sent to HUD with the rest of the HUD application fee or another 15 basis points (0.15% of the proposed mortgage amount).
This is the most expensive step as the submission includes working drawings to commercial specifications. The closing of the construction loan is the first draw so there is no other part of the application due. It is complete and includes documentation of all the development team. The construction contract is also included.
This stage results in a Firm Commitment to Insure the Mortgage. We set up the closing date which an take 30 days for the G/C to get his bond in place and other documentation. The GNMAs will be sold prior to the closing and the entire mortgage amount is in escrow waiting for the draws to begin.
Step 4: can take HUD 1-2 months to issue the commitment. Borrower typically takes four to six months to complete plans, specs and get final costs
Step 5: Closing
(a few weeks from receipt of the commitment)
The GNMAs are sold and a good Faith Deposit, locks the rate and is paid two to four weeks before the closing at ½% to 1% of the mortgage amount. It is always refunded a few weeks later at closing All costs are financible if they are determined to be reasonable. ( eg: Attorney’s fees of $15,000 to handle the closing may be reasonable. Attorney’s fees of $200,000 on $2M loan would not).
Step 6: Construction to Permanent Closing
After construction is completed a CPA completes a “Cost Certification” or audit of the General Contractor’s books and records for the loan. When this audit is accepted by all the parties, the mortgage becomes a permanent mortgage and the 40 year term starts. These closings usually occur by mail.
The total time line can take from 6 to 9 months if all documentation is complete and accurate. The shorter time frame is if completed plans and specs are already in the form HUD requires them For more detailed information, please review the 221(d)4 program for apartments and the 232 program for health care on the WEB at www.HUD.gov. Choose multifamily housing.
Costs During the Process
Email us at firstname.lastname@example.org to find out if your project is eligible for FHA insurance or call 800-536-3371.
Hospital Finance: FHA Loans for New Construction or Rehabilition
Minimum Criteria for Consideration for FHA Insured Hospital Mortgage Insurance
These are guidelines to help potential applicants reach their own preliminary assessments on whether or not they meet the minimum criteria for Mortgage Insurance. Passing this preliminary test DOES NOT assure that an application will be approved.
1) Is your facility a licensed hospital? (Requisite Response: YES)
2) a) For the most recently completed Fiscal Year, were the total patient days for the following services more than 50% of the hospital’s total patient days? (Requisite Response: NO)
Chronic convalescent and rest
Drug and alcoholic
Nervous and mental
Note: If the patient days for the above services are slightly over 50%, calculating adjusted patient days may yield a result under 50%. Contact us for an adjusted patient days worksheet.
b) Through the end of the project construction and for two complete Fiscal Years thereafter, do you anticipate that during any Fiscal Year the total of patient days for the above services will be more than 50% of the hospital’s total patient days? (Requisite Response: NO)
3) Does your State have a Certificate of Need (CON) process?
a) If yes, has a CON been issued? (Requisite Response: YES or PENDING)
4) After the project construction is completed, will the mortgage exceed 90% of the estimated book value of all property (existing before project, new additions and/or renovations after project) that secures the mortgage? (Requisite Response: NO)
5)Will you grant to the lender and the insurer a first mortgage on the entire hospital property, plant, and equipment, including receivables? (Note: exceptions may include leased equipment, off site property, capital associated with affiliations, etc.) (Requisite Response: YES)
6)Are you willing to make monthly payments into a Mortgage Reserve Fund that will build to: (a) a balance equal to one year of debt service after five years, and (b) a balance equal to two years of debt service after 10 years? (Requisite Response: YES)
7)Over the last three full Fiscal Years, has the average operating margin been equal to or greater than 0.00? (Requisite Response: YES)
8)Over the last three full Fiscal Years, has the average debt service coverage ratio been equal to or greater than 1.25? (Requisite Response: YES)
Note: Include leases in calculations for both Operating Margin and Debt Service Coverage Ratio below.
Operating Margin Equals:
(Operating Net Income from Two Full FYs Ago)
(Operating Net Income from Three Full FYs Ago)
(Total Operating Revenues from Two Full FYs Ago)
(Total Operating Revenues from Three Full FYs Ago)
Debt Service Coverage Ratio (DSC):
(Depreciation Expense + Interest Expense Current Portion of Long Term Debt (Prior Year))
Compute the DSC for each of the last three full fiscal years, then compute the three year average for this calculation.
Multifamily Mortgage Insurance For New Construction and Substantial Rehab
There is volatility in financial institutions due to market trends, political upheaval and pandemic unknowns. One of the steady sources of mortgage debt for new construction remains the FHA insured programs. Insured loans through FHA have always had the most favorable terms for refinance, acquisition and new construction. Lenders are insured 100% by HUD; therefore, each loan is backed by the full faith and credit of the US Government. The entire mortgage amount is funded through the sale of GNMA securities. If there are no GNMA buyers in the market; the government buys them. This also means that on new construction and substantial rehabilitation loans, the entire mortgage amount is raised and ready a few weeks before the closing, so the mortgagee can’t “run out” of funds during the construction process.
What follows is an explanation of the programs, terms, what costs are incurred, and how the application and construction processes work. Assistance is always available to optimize the process.
The FHA/HUD new construction/substantial rehabilitation program is designed for apartments and health care facilities. It is conventional financing. FHA insures the mortgage and this results in favorable terms and low rates. The mortgagee is the direct lender and draws are funded through our servicer and/or bank. Subsidy requirements, affordable housing percentages, and low/middle income requirements for tenants are not required. The program allows for upscale projects with pools, tennis courts, etc. as long as market rents and market expenses support the costs. HUD is not the lender; they are the insurer of the mortgage and the insurance fund has always been profitable. HUD makes money with these programs.
The basics of the new construction program are fixed rate (no balloon) forty-year permanent mortgage and a construction mortgage at the same rate based on 90% of costs for health care programs and 85% of costs for multifamily. Many transactions allow a credit for appreciated land value. This calculation uses value estimates from an appraiser for the intended use of the land, as of the day of the closing. In turn, this may allow loan sizes to climb to more than 100% of total project “costs”. The construction mortgage and the permanent are both non-recourse and always assumable (not just a one-time assumption).
The forty-year amortization period starts when construction is completed and accepted by HUD, the lender and developer. That’s when the loan becomes a permanent mortgage. The program also can allow for a 10% Builder’s Sponsor’s Profit Risk Allowance (BSPRA) for apartments. This is similar to a “developer fee” that is based on all the hard and soft costs not including the land and is added to 85.0% of the costs as the mortgage amount.
This is a program sponsored by the federal government, so Davis-Bacon or prevailing wage rates apply. If the development is five stories or less, the Davis-Bacon rate is the single-family prevailing wage rates as reported to the department of labor for the geographic development area. The contractor and architect should be aware of and follow these rules.
Both the permanent and construction mortgages are non-recourse loans, so there are protections that the mortgagee and HUD require. Among these are:
The architect must supervise and sign off on the construction draws so what he calls for in the plans and specs is sure to be there.
The general contractor must provide a performance completion bond so that the financial risk, “will he finish on time and on budget”, is an insurance company’s responsibility.
One of the last draws of the construction loan includes funding for a cost certification/audit by a CPA of the contractor’s books to ensure that all the funds were properly applied to the property.
The closing of the construction loan is the first draw of the construction loan. Therefore, all the documents, detailed architectural plans and specs are completed and submitted for review before the closing.
New Project Concept Meeting
Lenders must participate in a concept meeting with the appropriate HUD coordinator prior to an application for:
a) all market rate and affordable new construction/substantial rehabilitation projects.
b) refinancing/purchase transactions if there are concerns about marketability, environment, competing proposals or for projects with significant cash out or large loans.
The HUD coordinator will schedule the meeting either in person or by teleconference. There is no cost for this project concept meeting.
Third party Feasibility and Phase I Environmental Reports are required at this stage. The mortgagee will complete the processing for HUD under the MAP program. HUD is supposed to become a review agency under this process rather than a processing agency for these loans. The project essentially gets a pass/fail during the pre-application review by FHA. The pre-application results in an invitation letter that will include rents and operating expenses that FHA will underwrite the mortgage insurance to. Maximum mortgages can be determined by applying the NOI or EBIDTA to the minimum debt service constraint of 1:17. The letter will also identify operating deficits, absorption rates and other financial information. Applications that receive an invitation letter generally close. We have always closed loans after receipt of a MAP invitation letter that is acceptable to the borrower. The cost for the pre-application submission is half of the HUD Exam fee.
Firm Submission Stage
After the invitation letter is received, the mortgagee and the borrower will put together a Firm Submission Package. The firm submission is extensive and includes complete plans and specifications known as working drawings. The qualification of all participants is examined and passed on. This includes the borrowing entity, general contractor, management agent, architect and others involved with the project.
If the application is submitted correctly, the loan should be committed within 45 days of FHA/HUD’s receipt of the firm submission package. The cost at this stage is the other half of the HUD exam fee. Third party reports include an engineering review of the plans and specs and an appraisal. The lender then receives a commitment to insure the mortgage. Generally the commitment is good for thirty days (with one extension) and we can closing comes within a few weeks provided the local HUD offices’ schedule can accommodate these time periods. If the mortgagee completed the package correctly and reviewed all the principal parties to meet the requirements of the program, and the market didn’t change, a commitment will be issued in accordance with the invitation letter. Generally the sale of the GNMAs can happen at any time once the commitment is received. Mortgagees that do not hold their loans and sell the servicing bid the mortgage with bond traders for the GNMA sale. The lowest interest rate wins. Some larger institutions that hold and service their mortgages can fix rates where they believe it is in their best interest.
Typical Upfront Costs
Typical up-front costs begin with the third-party reports. Mortgagees will charge a small processing fee and receive the costs to prepare the pre-application process. The costs for a Phase I environmental report and a feasibility study are received in advance for the pre-app stage. Other reports may be required depending on findings. These may include lead paint tests depending on the age of the property, noise studies etc. Typically, we receive funds for the feasibility study and a phase one for the pre-application. With the firm submission, the cost for the engineering review the appraisal are received. These funds are based on bids from contractors approved by the lender and HUD.
The second stage is the preparation of the firm submission. This begins after the mortgagee submits completed plans and specs (Commercial grade working drawings). These go to an engineering firm that reviews them for conformance to local building codes, compliance with ADA (American’s with Disabilities Act) and other requirements. The property is also appraised at this point and the appraiser ties in all the numbers from the engineering review firm, the feasibility study and his own findings. The costs include the third-party reports for the engineering firm, the appraisal and the second half of the application or exam fee paid to HUD. The total exam fee is equal to 3/10 of one percent of the requested loan amount.
Additional up-front costs incurred include architects, legal expenses, other fees that may be charged by municipalities, sellers etc. The largest costs before the closing is usually design fees paid the architect. Most all the costs, except the operating deficit are financeable.
FHA has a maximum of 45 days in which to issue the firm commitment to the mortgagee to insure the mortgage. Most HUD offices conform to this practice or they must write a report to headquarters explaining why. The borrower signs this commitment along with the mortgagee and the closing is set up. The rate is locked and any pre-payment penalties negotiated. The last up-front cost at this point is a good faith deposit that bond traders use to buy hedges should rates move between rate lock and the closing date. The good faith deposit is typically 1.00 to 1.50 percent of the mortgage amount. The closing date is usually known at this time as the mortgagee must know when to deliver the GNMA securities. The good faith deposit is generally refunded at the closing. The borrower leaves the closing and has no responsibility to provide any additional funds no matter what happens.
The construction loan closing is the first draw so all financible expenses are reimbursed or credited to the developer. This includes third party reports, application fees, legal fees, architectural and engineering costs, permits etc. This is also day one of construction and the general contractor is on the clock. Construction usually starts immediately. The construction loan ends when the cost certification/audit of the contractor’s numbers are accepted by the mortgagee and HUD. This closing is generally handled through the mail by the mortgagee’s attorney, HUD and the borrower. The costs have already been covered in the mortgage. The 40 year term starts and the mortgagor begins paying the permanent mortgage. The working capital reserve, and any unused operating deficit, is refunded to the borrower when the property has achieved sustaining occupancy.
At the first (construction) closing, documents are signed by all parties and as soon as title is cleared and the note and other documents are recorded, the mortgagee wires funds to the borrower’s attorney who is usually the agent for the title company. This is the first draw of the construction loan that includes the value of the land, all mortgageable expenses the borrower has previously incurred including third party report costs, attorney’s fees, architectural fees, building permits, impact fees and other cost certifiable expenses. The total time frame from the endorsement of a financing agreement with the mortgagee to closing of the construction loan can typically take four to nine months.
One of the most important decisions is choosing a mortgagee. HUD has little to do with the processing and the mortgagee is expected to know the programs and complete all of the insurance application for HUD’s review. Our experience is nationwide and has covered all of the HUD area office HUBs. Our development background has helped developers fine tune their projects for HUD approval. Contacting HUD or looking at information on HUD’s website can be misleading. Some program parameters are changed on HUD’s Q&A website, with mortgagee letters and other information only approved underwriters know how to access. Many licensed HUD/FHA multifamily mortgages specialize in buying and selling loans to build up their servicing portfolios/processors with these companies don’t understand the basic real estate decisions that can be made that can help or adversely affect loan amounts and terms.
As always, this is a program that can have subtle and major changes depending on each development’s circumstances. There are some unique requirements for HUD insured loans as there are for most all loan programs. We assist and prepare all the applications for submittal and guide the borrowers through the entire process. Those who use and begin to understand the program, use it exclusively.
HUD Multifamily Insurance/Loan Programs For New Construction Substantial Rehab & Refinance Loans
Little known to most real estate investors, the Federal Housing Association (FHA), in conjunction with the U.S. Department of Housing and Urban Development (HUD), collectively offer mortgage insurance programs for both apartments and health care facilities (such as assisted living facilities). The programs cover substantial rehab/new construction, as well as refinance/acquisition loans. FHA and HUD are not the lender; they are the insurer of the mortgage. These “HUD” loans are offered through FHA-approved lenders.
Some of the unique benefits of these FHA-insured, “HUD” sponsored loan programs are provided below:
Because of the government-back mortgage insurance, these programs offer more favorable loan terms and lower interest rates than conventional construction and rehabilitation loans.
Section 8 subsidy requirements, affordable housing percentages, and low/middle income requirements for tenants are not required.
Financing of upscale multifamily properties with pools, tennis courts, and other amenities is allowed - as long as market rents and market expenses support the costs.
The loans have fixed interest rates and forty-year terms with no balloon payments. The forty-year amortization period starts when construction is completed and the loan becomes a permanent mortgage.
Loan amounts are based on “loan to cost” ratios of 90% for healthcare projects and 85% for multifamily projects.
Final loan amounts often allow a credit for appreciated land value at closing. This calculation uses value estimates based on the value, as of the date of the closing, for its intended use. Consequently, final loan amounts may climb to more than 100% of total project costs resulting in negative equity or cash out!!
These mortgages are non-recourse and always assumable (not just a one-time assumption).
The program can also allow for a 10% Builder Sponsor Profit Risk Allowance (BSPRA) for apartment loans. This is similar to a “developer fee” that is based on all the hard and soft costs (excluding land) and is added to 85% of the costs or mortgage amount, and can be used to reduce the amount required from the sponsor at closing.
Some additional requirements of these loans are:
Lenders must participate in a concept meeting with a HUD coordinator prior to application. The HUD coordinator will schedule the meeting either in person or by teleconference. There is no cost for this project concept meeting.
The first draw of the construction loan occurs on closing of the construction loan. Therefore, all documents, detailed architectural plans and specs must be completed, submitted and approved before closing.
The project architect must supervise and sign off on all subsequent construction draws to ensure that the plans and specs have been followed.
The general contractor must provide a performance completion bond so the financial risk that a project “will be finished on time and on budget”, is the bonding company’s liability.
One of the last draws of the construction loan includes funding for a cost certification/audit of the contractor’s books to be performed by a CPA, the purpose of which is to ensure that all funds were properly applied to the project.
One of the most important decisions in choosing a lender is experience with HUD programs. Lenders are expected to know HUD’s programs and be able to complete the application for HUD’s review. An experienced mortgagee can help the Sponsor make basic real estate decisions that can ensure the best loan amounts and terms. Developer/Borrowers who use these programs, use them exclusively.