New HUD Loan Policy Change

On today’s show we are reporting on a change to financing rules in the US that stand to improve the numbers for multi family apartment projects. 

We are talking about the HUD financing. This is more difficult financing to get than agency debt like Fannie Mae or Freddie Mac. But it is superior financing. There are several different loan types. I’m going to focus on the HUD 223F loan, but everything I’m about to say also applies to the HUD 221D4 which is a construction loan combined with a permanent loan. The reason we are talking about it now is the result of a new policy change is part of a new announcement .

Under the existing rules you can save up to 0.35% on your annual MIP with the Green MIP Reduction program for HUD 223(f) loans. This also applies to new construction loans like the 221d4.  

The policy change eliminates the distinction for Green loans and normalizes the mortgage insurance premium at 0.25% for all multi-family loans. This reduction in rate means that all other things being equal, you could borrow 4% more in loan principal for the same monthly loan payment.

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Episode Transcript

(00:01):
Welcome to the Real Estate Express podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. On today's show, we're reporting
on a change to financing rules in the US that stand to improve
the numbers for multifamily apartment projects.
We're talking about HUD financing.
This is more difficult financingto get than agency debt like
Fannie Mae or Freddie Mac, but it is superior financing.

(00:24):
There's several different loan types and I'm only going to
focus on the HUD 223F loan today, but I'm seeing everything
I'm about to say applies to the 221 D four and several other
loans. The 221 D 4, of course, is a
construction loan that is combined with a permanent loan.
The reason we're talking about it now is the result of a new
policy change that's being announced by Secretary Scott

(00:46):
Turner, and it affects the mortgage insurance premium.
But first, let me describe the basic parameters of the HUD 223F
loan. This is a loan for stabilized
assets in the US, which meet therequisite debt coverage ratio of
1.15 for a minimum of 30 days. The loan will Max out at 87%
loan to value with that debt coverage ratio of 1.15,

(01:06):
Whichever's lower. There are even more generous
terms for buildings that meet the HUD affordability criteria,
but for now I'm confining the discussion to market rate
apartments. The loan is a fully amortized 35
year loan. It's a non recourse loan that's
assumable. So that means you can sell the
loan with the property. There's a 10 year lock up which
means you're going to be paying a prepayment penalty if you

(01:28):
refinance out of the loan in the1st 10 years.
That prepayment penalty is 10% of the loan amount in year 1,
and it declines by 1% a year, down to 1% by year 9 and 0% by
year 10. The FHA mortgage insurance
premiums, or MIPS as they're called, are one of the most
important expenses you need to take into account in your
budget. For example, for most 223 F

(01:48):
borrowers, the annual MIP is 0.6% of the loan amount.
For conventional properties, by contrast, affordable properties
have a reduced MIP of 0.45%. But the green MIP reduction gets
you a discounted 0.25% annual MIP as long as you make energy
efficient improvements to the property and receive a high
enough score on an approved certification.

(02:09):
So you can save 0.35% of on yourannual mortgage insurance
premium with the green MIP reduction.
That applies to new constructionloans as well.
But this week, the Federal Housing Administration proposed
an across the board leveling of the upfront, capitalized and
annual mortgage insurance premiums down to 25 basis points
for all multifamily programs. So all FHA loans, including the

(02:31):
223 F, the 221-D4 are automatically being granted 1/4
point annual MIP rate. The green MIP is essentially
being eliminated and there will be no longer any hoops to jump
through to qualify for the lowerMIP rate.
The quarter point MIP rate is now the standard across all FHA
loans. For loans that previously closed
under a green 0.25% rate, the requirements to evidence the

(02:55):
initial green building achievement and the annual
reporting of energy performance is being eliminated.
So the annual energy audit, the scoring requirement is
completely gone on any loans that previously closed under the
green MIP program. So let's look at what this
reduction means in terms of borrowing costs for a borrower.
It's safe to say that loans in today's environment are going to
be limited by debt coverage moreso than the loan to value ratio.

(03:19):
The HUD 223F loan is limited to 87 1/2% loan to value and a debt
coverage of 1.15 S. The loan rate is going to be set
using an offset from the yield on the 10 year treasury.
Most HUD lenders today are pricing the loan around 5.75%
interest rate. For those that are looking only
at the interest rate, you might find a cheaper rate out there in
the marketplace, but it's going to be for a much lower ratio

(03:41):
loan with higher debt coverage. And then you need to remember
that a bank loan or an agency loan will have a term associated
with it. The amortization for a Fannie
Mae loan might be 30 years, but it might have a five year A7 or
A10 year term. The longer the term, the higher
the rate. Fannie Mae loans today are
pricing around 5.8% for a 15 year term at 65% loan to value,

(04:04):
and it's 6.1% for a 15 year termwith an 80% loan to value.
So it's more expensive financingthan HUD.
And of course 65% is not considered very high leverage
for stabilized assets. You may want to consider higher
leverage, a competitive rate, and a longer amortization, which
means the HUD loan is the only game in town.
So let's look at the impact of the MIP reduction on a loan.

(04:25):
If the rate is lower than all ofthe things being equal, you
should be able to increase the loan amount slightly and
correspondingly reduce your equity requirement on a new
acquisition or on a stabilized asset.
When you do the math, assuming the loan is debt coverage
limited, which almost certainly is for every dollar in monthly
loan payment, you can increase the loan amount by $7.87.

(04:47):
There's a lot of math behind that calculation, so let me
break it down for you with an example.
Let's imagine for a moment that you bought an apartment complex
with a few 100 units and your loan amount is let's say $30
million. At a 5.75% interest rate, this
loan is going to cost you 166,000 and $50.00 a month every
month for the next 35 years. That's going to be your loan

(05:07):
payment. The 35 basis point reduction in
interest rate with the elimination of the green MIP
means that you can increase yourloan size by 1.3 million and
maintain the same loan payment, or conversely, reduce your
equity requirement by 1.3 million and maintain the same
loan payment. Now, of course, the amount of
equity you need is going to be afunction of the cap rate you
paid for the property. Now, we've seen cap rates expand

(05:30):
over the last couple years, which means prices for
apartments have fallen in most markets since the peak in 2022.
Some estimates put the fallen values anywhere between 20 to
30% as a result of the higher interest rates.
So this increase in loan proceeds is approximately 4%
compared with the loan size associated with the higher
mortgage insurance premium at 0.6%.

(05:50):
And it's going to take a few months for the change to be
fully implemented. But this is good news for the
industry as a whole. As you think about that, have an
awesome rest of your day. Go make some great things
happen. And we'll talk to you again
tomorrow.