In the underwriting process, lenders determine if borrowers meet certain criteria by examining their credit, capacity, and collateral (the 3 Cs).
As defined by HUD, substantial renovation can occur in several situations. First, it can occur if a renovation involves making required replacements, repairs, and improvements that involve the replacement of two or more major building components. It can also happen when rehab costs exceed certain thresholds, including $6,500 per dwelling unit (adjusted by HUD's authorized high-cost percentage), 15% (exclusive of soft costs) of the property's replacement cost/ fair market value after required repairs, replacements, and improvements, or 20% of mortgage proceeds for rehabilitation expenses.
SPRA (Sponsor's Profit and Risk Allowance) is no more than 10% of the total estimated cost of: architect's fees, legal, organizational, carrying and financing charges, and audit expenses. It is included in the Replacement Costs and used if there is no identity of interest between the mortgagor and general contractor.
A single asset entity, or SAE, is usually a limited liability company (LLC) that owns real estate but no other assets. In real estate, an SAE is typically set up for the ownership of a property. HUD multifamily loans typically require that borrowers hold their property in a single asset entity, which is also often referred to as a single-purpose entity (SPE).
Replacement reserves consist of money set aside to fund the replacement of a building’s equipment and components as they wear out. All HUD multifamily loans require a minimum amount of replacement reserves, but this varies based on loan type. For example, HUD 221(d)(4) loans require a minimum replacement reserve of $250/per unit, per year. Exact replacement reserve requirements are typically determined by a PCNA (project capital needs assessment), which must be completed every ten years.
Rental assistance properties are defined as properties in which low-income or very low-income tenants qualify for monthly rental assistance. The most common rental assistance program is the HUD Section 8 program. Many properties funded with HUD 221(d)(4) and HUD 223(f) loans participate in Section 8, and Section 8 properties financed with these loans can also be refinanced through the 223(a)(7) program.
Rehabilitation is defined as any costs (including materials, tools, and labor) associated with improving buildings. This usually excludes routine and/or minor repairs. While HUD 221(d)(4) loans are equipped to handle the substantial rehabilitation of multifamily properties, HUD 223(a)(7) loans can typically only finance moderate repairs.
If a loan is recourse and the borrower defaults (fails to repay the loan), the lender can go after both the collateral and the borrower’s assets which are not used as collateral. Fortunately for borrowers, all HUD multifamily loans are non-recourse, which means the lender cannot go after any non-collateral assets in the case of a loan default. However, most HUD multifamily loans do include “bad boy” carve-outs, which state that if a borrower commits certain bad acts, like fraud or embezzlement, the loan will become recourse.
Prepayment occurs when a borrower pays off a mortgage balance before maturity (the end of the loan term). The FHA requires prior approval for the prepayment of HUD multifamily loans. In most cases, HUD multifamily loans require a prepayment penalty, which reimburses the lender if the borrower attempts to pay off the loan early. Most HUD multifamily loans have a two-year lockout (a period in which the borrower cannot repay the loan at all), followed by an 8-1% declining prepayment penalty.
OAMPO (The Office of Asset Management and Portfolio Oversight) is an office that helps direct various parts of HUD’s multifamily housing programs. In particular, this office develops and interprets policies, controls a number of field operations, manages partner relationships, and is responsible for multifamily assets after the development phase.
Non-recourse loans are typically secured by collateral such as real estate. Unlike recourse loans, if a borrower defaults, the lender can’t hold the individual personally liable for the unpaid debts. Because of this, lenders can’t seize personal property or garnish wages. With a non-recourse loan, the lender accepts a certain amount of loss. All HUD multifamily loans, including HUD 221(d)(4) loans, HUD 223(f) loans, HUD 223(a)(7) refinance loans, and HUD 232 healthcare loans are fully non-recourse.
Multifamily rentals, which are also known as multi-dwelling units/MDUs, comprise multiple but separate living units within a structure or structures. A common example is an apartment building, but multifamily rentals can also come in the form of duplexes, triplexes, quadplexes, mixed-used properties, and independent living facilities. Smaller HUD loans, like the FHA 203(b) loan can finance 1-4 unit properties. HUD multifamily loans, such as HUD 221(d)4) and HUD 223(f) loans, can finance apartment buildings, mixed-used properties (with limits on the amount of commercial space), and independent living units.
MIP (Mortgage Insurance Premium) consists of annual payments on HUD mortgages. MIP is first paid at closing, and typically costs 1% of the loan amount, though this varies. MIP for HUD multifamily loan programs must then be paid annually. Specific costs also vary by program.
MAP (Multifamily Accelerated Processing) establishes national standards for approved lenders to prepare, process, and submit applications for FHA/HUD multifamily financing. Lenders that are MAP-approved will typically see their borrower’s applications processed much more quickly than those that use TAP (Traditional Application Processing.)
Low-to-moderate income housing is housing designed for people whose incomes are low to moderate when compared to prevailing incomes in their area. HUD attempts to promote the supply of low-to-moderate income housing via the Section 8 and LIHTC programs, both of which are available to properties financed with HUD 221(d)(4) and HUD 223(f) loans. HUD 223(a)(7) loans are fully equipped to refinance HUD 221(d)(4) and HUD 223(f) properties with low-to-moderate income housing-based income restrictions.