Everything You Need to Know About FHA Commercial Real Estate Loans

FHA commercial real estate loans allow investors and business owners to purchase or refinance multifamily residential properties with low down payments and favorable terms. As a leading provider of mortgage insurance, the Federal Housing Administration (FHA) offers several commercial loan programs to encourage affordable housing development.

In this comprehensive guide, we’ll explain what FHA commercial loans are, their benefits, eligibility requirements, and how to qualify for financing. Whether you’re looking to invest in your first rental property or expand your real estate portfolio, read on to learn if an FHA commercial loan is right for you.

What Are FHA Commercial Loans?

The FHA offers mortgage insurance on loans for certain types of commercial, residential, and healthcare properties, including:

• Multi-unit rental housing (5+ units)
• Assisted living facilities
• Nursing homes
• Hospitals

With an FHA-insured loan, you can finance the purchase, refinancing, or improvement of these properties with less cash out of pocket. The FHA doesn’t directly lend money, but instead offers insurance to approved lenders to reduce their risk. This allows lenders to offer lower interest rates and down payments to borrowers.

Top Benefits of FHA Commercial Loans

Here are some of the biggest advantages of FHA commercial financing:

Low Down Payments

You can put as little as 10% down on the purchase of multi-unit housing. For refinancing, the minimum equity requirement is also just 10%. This makes it easier to buy and refi investment properties without large reserves of cash.

Low Mortgage Insurance Premiums

Upfront and annual mortgage insurance premiums on FHA loans are very reasonable compared to conventional financing This results in lower overall costs

Longer Loan Terms

FHA commercial loans allow for loan terms up to 40 years for new construction or substantial rehabilitation This results in lower monthly payments and positive cash flow,

Assumable Financing

FHA commercial loans can potentially be assumed by a qualified buyer when you sell. This enhances a property’s resale value.

Non-Recourse

FHA commercial loans are non-recourse, meaning the lender can only pursue the collateral property in case of default, not your other personal assets.

Commercial Property Types Eligible for FHA Loans

The FHA offers a few distinct commercial loan programs:

Multi-Family Rental Housing

Also known as Section 207/223f, this program insures loans for existing apartment buildings with 5+ units. Properties must be at least 3 years old and meet certain physical condition standards.

Residential Care Facilities

Section 232/223f insures mortgages for assisted living facilities, nursing homes, board and care homes, and hospitals that provide residential-type care.

Affordable Housing

Section 221(d)(4) helps finance new construction or substantial rehab of multi-family rental housing targeted at low/moderate income tenants.

Co-op Housing

Section 213 provides financing for new construction or rehab of housing cooperatives for residential use. Eligible sponsors include non-profits, cooperatives, and public entities.

FHA Commercial Loan Requirements

To qualify for an FHA-insured commercial mortgage, here are some of the key eligibility standards:

• The property must meet FHA physical condition requirements as determined by an appraisal.

• Multi-family housing must have 5+ units and be at least 3 years old (for refinancing).

• For assisted living facilities, at least 51% of space must be residential in nature per FHA requirements.

• The borrower must be an approved FHA mortgagee or sponsored by an approved lender.

• Commercial space at mixed-use properties is limited to 25% of total floor area.

Meeting these requirements along with standard credit, income, and asset review will determine if you qualify. The specific standards vary based on the loan program, so discuss your particular project with approved FHA lenders.

How to Apply for an FHA Commercial Loan

Here is an overview of the FHA commercial loan process from start to finish:

1. Evaluate your project – Determine what type of commercial property and FHA loan program best fits your needs.

2. Find an approved lender – Connect with FHA-approved lenders experienced in commercial lending to discuss financing options.

3. Complete the application – Provide financial statements, credit history, business documents, plans and all required paperwork.

4. Get the property appraised – The lender will order a thorough appraisal to confirm the property’s value and condition meet FHA requirements.

5. Obtain FHA firm commitment – After reviewing the full application, the lender applies for a Firm Commitment from FHA agreeing to insure the loan.

6. Close on financing – During closing, you’ll sign final loan documents and receive the mortgage proceeds minus closing costs (typically 1-3% of loan amount).

The approval process can take 30-90 days depending on the lender and complexity of the project.

Alternatives to FHA Commercial Loans

FHA-insured financing offers great benefits, but it’s not the only option. Here are a few other types of commercial mortgages to consider:

• Conventional loans – Banks and credit unions provide commercial real estate loans without government insurance. Often require 20-30% down payments.

• SBA 7(a) loans – The SBA guarantees loans up to $5 million for eligible small business commercial real estate purchases.

• USDA loans – For properties located in designated rural areas, the USDA Rural Development program offers low-cost financing.

• Bridge loans – Asset-based financing used for short-term needs prior to securing permanent long-term financing.

• Hard money loans – Loans from private investors collateralized by the real estate itself, with higher rates/fees.

• Crowdfunding – Pool money from multiple investors to fund commercial real estate projects.

Talk to a qualified business lender to review all your commercial mortgage options.

The Bottom Line

FHA commercial real estate loans allow investors and developers to buy, refinance, or rehabilitate certain types of properties with low down payments and favorable loan terms. If you qualify, FHA programs can help you acquire multifamily housing and healthcare facilities while preserving capital.

Just be sure to work with an approved lender familiar with FHA requirements. They can guide you through the documentation, financing options, and process efficiently. With the right property and loan program, FHA commercial financing can propel your next commercial real estate venture.