FHA Commercial Loan Requirements: A Comprehensive Guide for 2023

The FHA commercial loan program allows borrowers to purchase or refinance multifamily residential properties and healthcare facilities. These government-backed loans offer more flexible underwriting standards and lower down payments than conventional commercial loans.

As an investor exploring FHA financing options, it’s important to understand the program requirements. This article provides a comprehensive overview of FHA commercial loan requirements for 2023.

Overview of FHA Commercial Loan Programs

The FHA insures commercial mortgages through several main programs

• Section 232/223(f) – For purchasing or refinancing multifamily housing with 5+ units. Properties must be at least 3 years old.

• Section 221(d)(4) – For new construction or substantial rehabilitation of multifamily housing with 5+ units

• Section 232 – For construction, purchase, or refinancing of residential care facilities like nursing homes, assisted living, and board and care homes.

• Section 242 – For purchasing or refinancing hospitals and healthcare facilities.

These programs allow lenders to offer longer terms and lower interest rates by insuring the loans against default. As with FHA single family loans, commercial loans are originated and funded by lenders, while HUD/FHA provides the mortgage insurance.

Commercial Property and Project Eligibility

For a commercial property and project to qualify for FHA-insured financing, they must meet certain eligibility standards:

• Property type – Multifamily housing (5+ units), elderly housing, assisted living, nursing homes, hospitals, and other approved healthcare facilities.

• Location – The property must be in an eligible location. FHA has specific guidelines regarding acceptable sites, neighborhoods, access to transportation, parking, and other factors.

• Construction status – For Section 232/223(f) loans, properties must be completed or substantially rehabilitated for at least 3 years. Section 221(d)(4) and Section 232 loans can finance new construction.

• Occupancy requirements – For multifamily housing, at least 85% of units must be renter-occupied. Required owner-occupancy rates vary for healthcare facilities.

• Property standards – The property must meet HUD minimum property standards (MPS) and local building codes.

• Environmental review – Multifamily housing and healthcare facilities must pass an environmental review considering potential hazards, noise, soil stability, air quality, and other factors.

• Zoning – The property must comply with local zoning and land use regulations.

Commercial Borrower Eligibility

The FHA commercial loan programs are open to both for-profit and nonprofit entity borrowers, including:

• Corporations
• Limited Liability Companies (LLCs)
• Partnerships
• Trusts
• Individuals

Borrower eligibility requirements include:

• Previous experience – The principals must have acceptable previous experience owning and operating similar projects.

• Credit requirements – FHA evaluates the borrower’s credit history, NOT the property’s financial performance. Minimum credit scores generally range from the high 500s to low 600s.

• Net worth – The property owner(s) must meet net worth requirements that vary based on project size. Generally $1 million minimum net worth.

• Background checks – Borrowers undergo screening for previous criminal offenses, debarments, and other red flags.

Nonprofit groups have more flexible requirements regarding credit and previous experience.

Commercial Property Appraisal and Valuation

FHA requires a thorough as-is appraisal from an FHA-approved appraiser to establish the property’s worth and determine the maximum insurable loan amount. Key areas evaluated:

• Value – Appraiser provides an opinion on the market value of the property via sales comparison, income capitalization, and cost approaches.

• Insurable value – The maximum amount that FHA will insure for the specific project.

• Economic life – Estimate of the remaining useful life of the property in years.

• Market analysis – Examines supply/demand, rents, vacancy rates, and competition in the local submarket.

For refinances, an as-is appraisal may be waived in favor of an existing FHA-insured loan amount or a broker opinion of value.

Mortgage Insurance Premiums

FHA commercial loans require upfront and annual mortgage insurance premium (MIP) payments added to the borrower’s payments:

• Upfront MIP – Ranges from 0.25% to 3% of the loan amount depending on program type and loan term. Financed into loan.

• Annual MIP – 0.45% to 0.80% of the outstanding loan balance paid monthly or annually.

• MIP term – MIP payments are required for the full term of the loan for multifamily properties and healthcare facilities.

Loan Terms and Amounts

Here are some key points on FHA commercial loan terms and amounts:

• Loan terms – Up to 40 years for multifamily (typically 20-35 years), up to 25 years for healthcare.

• Loan-to-value limits – Up to 83.3% for market-rate multifamily, 90% for affordable, up to 80% for healthcare.

• Maximum loan size – Varies by market and property type, but often several million for multifamily and tens of millions for hospitals.

• Supplemental loans – Separate supplemental loans available in addition to the FHA-insured first mortgage (subject to LTV limits).

• Assumable – FHA commercial loans can potentially be assumed by qualified buyers upon sale of the property.

Interest Rates

The interest rate on an FHA commercial loan is negotiated between the borrower and lender. Rates on government-backed loans are typically lower than conventional commercial rates.

Interest rates are fixed for the full term of the loan on all FHA commercial programs. The lender publishes current rate sheets showing available rates and terms.

Closing Process and Costs

The FHA commercial loan closing process is similar to other commercial mortgages. Some key points:

• Closing documents – Loan agreement, note, mortgage deed, security agreement, and other standard commercial loan documents.

• Closing costs – Borrower pays for third-party reports, lender fees, legal fees, filing fees, and standard commercial loan closing costs.

• Escrows – Monthly escrow deposits with lender for property taxes, insurance, MIP payments, and replacement reserves.

• Pre-closing reviews – Closing may entail FHA pre-closing reviews of documents, borrower equity, title, and other factors.

Post-Closing Asset Management

With an FHA commercial loan, the building owner must follow HUD’s long-term asset management requirements:

• Property inspections – Annual inspection by lender to ensure proper maintenance and building standards.

• Financial reporting – Annual audited financial statements must be provided to lender.

• Reserve accounts – Ongoing monthly deposits to replacement reserve and other accounts mandated by HUD.

• Rental policies – Follow HUD guidelines regarding tenant policies, leases, rent increases, vacancies, and fair housing.

• Prior approvals – Seek HUD/lender approval for leases over 3 years, prepayments, second liens, ownership changes, and other events.

• Property insurance – Maintain agreed-upon property and liability insurance levels.