Big Changes In Apartment Lending Criteria
Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. Today, we’re discussing a significant change in the lending market that might not have made any special headlines, but it’s very impactful to owners of multi-family apartments.
The majority of the multi-family apartment market is focused on agency financing, underwritten by folks like Fannie Mae or Freddie Mac. However, there’s another source of financing that can be even more beneficial for investors, namely the Department of Housing and Urban Development (HUD).
It’s true that the mention of HUD often brings to mind low-income housing. But this image does not accurately reflect all the programs HUD has to offer. These include initiatives for senior housing, multifamily, permanent financing, construction financing, and affordable housing.
The significant changes announced recently apply to both the 221-D4 and 223-F programs.
The HUD 221-D4 is a construction-to-permanent financing loan. It’s a 40-year, assumable, non-recourse, fully amortized loan, with a two-year construction loan at the front end. It locks the rate at the end of construction.
The 223-F program provides a permanent loan for stabilized multi-family apartment projects, targeting those well-established projects. This program used to have a three-year seasoning period requirement, which has now been reduced to 30 days once your project achieves the required debt coverage ratio.
HUD has been responding to market conditions and a significant reduction in the amount of multi-family units under construction. Hence, it has finally recognized the need for more loan proceeds to refinance construction loans and other maturing debt. Moreover, it’s looking to encourage the creation of middle-income housing units.
The most significant changes include: market rate projects are now underwritten at an 87% loan-to-value or loan-to-cost ratio, and a 1.15% debt-service coverage ratio. Affordable projects are being underwritten at 90% loan-to-value or loan-to-cost and a 1.11% debt-service coverage ratio. Additionally, HUD has added a middle-income classification within its 221-D4 program, allowing more leverage for projects that meet its definition of middle-income housing.
These changes are likely to make a considerable impact on real estate investors, leading to more opportunities. As always, have an awesome rest of your day, and remember to make great things happen. We’ll talk again tomorrow.
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