HUD Loans for Multifamily Properties: A Complete Guide

The Department of Housing and Urban Development (HUD) offers several financing programs to support the development and preservation of multifamily rental housing HUD-insured loans provide favorable terms to borrowers and help ensure affordable rental units are available across the country.

In this comprehensive guide, we’ll cover everything you need to know about getting a HUD loan for your multifamily property, including:

• HUD multifamily loan types and options
• Benefits and advantages of HUD multifamily financing
• Eligibility and underwriting requirements
• The loan process from start to finish
• Resources for finding and applying for a HUD multifamily loan

Whether you’re looking to buy, build, or refinance a multifamily property, HUD financing can be an excellent solution. Read on for a full overview of these government-backed loan programs.

Types of HUD Multifamily Loans

HUD offers several loan programs to meet different multifamily housing needs

• Section 221(d)(4): New construction or substantial rehabilitation of multifamily rental housing. Both for-profit and non-profit developers can use this program.

• Section 221(d)(3) Affordable housing preservation through new construction or rehab for non-profit developers

• Section 207/223(f): Purchase or refinancing of existing multifamily housing. Available to for-profit and non-profit borrowers.

• Section 202: Direct loans to non-profit developers of supportive senior housing.

• Section 232: Purchase/refinancing of residential care facilities like nursing homes and assisted living.

Within these main programs, HUD offers both direct loans and insured loans made by approved lenders. The terms, rates, and qualifying criteria vary based on the specific loan type.

Benefits of HUD Multifamily Financing

HUD multifamily loans offer several advantages over conventional financing:

• Low down payments: HUD programs require as little as 3% down for market-rate housing or 0% for affordable housing.

• Lower equity requirements: HUD will finance up to 83.3% of value on market-rate properties and up to 90% on affordable properties.

• Below-market interest rates: Interest rates on HUD multifamily loans are typically lower than conventional loans.

• Longer repayment terms: HUD offers up to 40-year loan terms, longer than many conventional loans.

• Flexible underwriting: HUD uses more flexible underwriting standards regarding debt service coverage ratio, property condition, appraisals, and borrower credit/financials.

• Assumable financing: Many HUD loans can be assumed by a qualified buyer if the property is sold, avoiding balloon payments.

For developers creating or preserving affordable, workforce, and senior housing, the advantages of HUD financing are hard to beat.

HUD Multifamily Loan Eligibility

To qualify for a HUD-insured multifamily loan, borrowers must meet certain standards:

• Previous experience developing, owning, or managing multifamily properties
• Sufficient personal/corporate financial strength
• Strong credit history with no major derogatory credit events
• Ability to cover required down payment and closing costs
• Property must meet eligibility requirements regarding zoning, design, unit mix, etc.

Underwriting also evaluates:

• Property appraisal and market need
• Debt service coverage ratio
• Loan-to-value ratio
• Borrower liquidity
• Experience and capacity of the development team

Affordable and mixed-income properties may have different eligibility and underwriting requirements. Work with an approved HUD lender to assess qualifications.

The HUD Multifamily Loan Process

If you want to buy, build, or refinance a multifamily property using HUD financing, follow these steps:

1. Find an eligible property. Make sure the property meets HUD requirements regarding location, zoning, design standards, and environmental regulations.

2. Partner with an approved lender. HUD works through a network of approved banks and mortgage companies to originate insured loans.

3. Complete a concept meeting. Meet with HUD to review your project concept before formally applying.

4. Submit a firm commitment application. Work with your lender to compile the full loan application and exhibits and submit to HUD.

5. Obtain firm commitment. After underwriting your application, HUD will issue a firm commitment outlining the approved loan amount and terms.

6. Close the HUD loan. Once you’ve satisfied any conditions from the firm commitment, you can close on the mortgage loan.

7. Manage the completed property. You must comply with HUD occupancy, reporting, and property maintenance requirements for the life of the loan.

This overview provides the basic workflow, but the exact process depends on your project specifics. Be prepared for a lengthy approval process that can take 6 months or more.

Finding HUD Lenders and Applying for Multifamily Loans

To get started with HUD multifamily financing, follow these tips:

• Contact HUD directly: Reach out to your local HUD office to discuss your project and get guidance on available loan programs.

• Find an approved lender: Search HUD’s list of approved multifamily lenders with experience originating FHA loans.

• Talk to developers: Speaking with other multifamily developers who have utilized HUD loans can provide insights on effectively navigating the process.

• Hire a consultant: Consider bringing on a HUD consultant to help advise on putting together a winning loan application.

• Start early: Initiate conversations with lenders and HUD 6-12 months before you need financing to give time for approvals.

With personalized support from both HUD and an experienced lender, the application process will go much more smoothly.

Alternative Financing Options

If you don’t qualify for a HUD loan or want to consider other financing:

• Fannie Mae and Freddie Mac offer multifamily loans with flexible underwriting.

• Bridge loans can provide quicker short-term financing for multifamily acquisitions before obtaining permanent HUD or agency loans.

• Bank/credit union loans offer multifamily mortgages, often best for smaller properties.

• State/local housing agency loans provide below-market financing for affordable housing in specific areas.

• Joint venture equity can be an alternative to debt financing for multifamily developments.

Be sure to shop around and compare terms, rates, eligibility criteria, and timelines across all your multifamily financing options.

The Bottom Line

HUD multifamily loan programs provide affordable capital to develop and preserve quality affordable and market-rate rental housing. The low down payments, flexible underwriting, below-market interest rates, and long repayment terms make HUD loans highly appealing financing solutions.

By partnering with an approved lender and HUD field office, multifamily developers can navigate the process from initial application through construction and permanent financing. HUD wants to work collaboratively with borrowers to create more affordable housing options and stronger, healthier communities.