Quick guide to commercial real estate growth with FHA/HUD financing

5 min read

Multifamily developers, investors, and owners require a healthy amount of capital to bring their housing communities to life. One option is a HUD or FHA loan for multifamily and senior housing properties, which aims to provide funding for developers to create both market rate and affordable housing. With the U.S. experiencing a deficit of 3.8 million homes, there’s never been a better time to focus on creating affordable multifamily housing.

Here’s a detailed guide to FHA/HUD financing, its historical significance, the types of loans available for commercial real estate projects, the benefits these loans offer, and the outlook for HUD lending.

Understanding FHA/HUD

The Federal Housing Administration (FHA) is a government organization that helps citizens become homeowners. It provides mortgage insurance on loans approved by FHA lenders.

FHA is a part of the Department of Housing and Urban Development (HUD), which oversees federal housing programs.

While popular among individual home buyers, both FHA and HUD have relevance in the commercial real estate industry as well. They provide loans specifically for multifamily developments and usually offer higher leverage, low-interest rates, and non-recourse debt. These loans can be used for construction, significant rehabilitation, and acquisition or refinancing of apartments and senior housing facilities.

A brief history of FHA/HUD

A little FHA/HUD history for you: The FHA was established in 1934, followed by HUD in 1965. FHA’s primary purpose was to stimulate the housing industry post-Great Depression by providing mortgage insurance to lenders. In turn, this encouraged lenders to extend loans to homebuyers.

FHA introduced mortgage insurance programs to mitigate the risk for lenders and make homeownership more accessible to low- and middle-income individuals. The insurance protected lenders against defaults, making it easier for borrowers to secure loans with lower down payments and longer repayment terms.

In 1965, FHA and other housing-related agencies became a part of HUD. HUD's transformative moments included addressing housing and urban development challenges, improving housing conditions, and implementing fair housing policies. Over the years, FHA/HUD financing has evolved to address specific housing needs, including rehabilitation loans, energy-efficient mortgages, reverse mortgages for seniors, and assistance programs for low-income families.

Types of FHA/HUD loans

FHA/HUD loan programs offer several commercial real estate financing options, each with its own requirements and stipulations. Here’s an overview of available FHA loan programs:

FHA 223(f) Refinance Program

FHA Section 223(f) loans can be used to refinance or purchase existing multifamily projects in all property classes. These are fully amortizing long-term loans (up to 35 years) offering high leverage at a Loan to Value of 85 percent, Debt Service Coverage of 1.176 and Loan to Cost of 85 percent. This program also allows for borrowers to cash out equity up to 80 percent of value and make necessary repairs.

FHA 221(d)(4) Construction Program

The FHA 221(d)(4) loan focuses on construction loans for multifamily projects. Loan terms are longer (up to 40 years fully amortizing) and high leverage with a Loan to Cost of 85 percent and a Debt Service Coverage of 1.176. This is the multifamily industry’s lowest-cost, highest-leverage, non-recourse construction loan available.

Eligible properties include market rate and affordable housing in all regions of the country. Affordable projects are eligible for higher leverage, reduced fees, and in some cases, expedited processing times.

FHA 232

FHA 232 loans can be used to finance licensed senior housing projects targeted for those residents that require personal care services in addition to housing, such as nursing homes and assisted living facilities. Funds can be used for new construction or the refinance, purchase, and rehabilitation of existing structures. Fixed-rate financing for up to 40 years makes this loan type attractive to developers.

Benefits of FHA/HUD loans

Commercial real estate developers gain access to several advantages when they choose FHA/HUD loans, including:

• Higher leverage to increase access to capital
• Extended loan terms to increase cash flow and reduce the need for frequent refinancing
• Fixed-rate financing for stability and predictability
• Non-recourse, which limits borrowers to repaying with collateral in the event of a default
• Favorable loan terms for affordable project types, such as higher leverage and reduced fees

Along with these FHA/HUD benefits, the FHA provides mortgage insurance to mitigate the risk to lenders. In turn, this may help borrowers receive more favorable interest rates.

Outlook for HUD lending

At a time when housing costs are through the roof, the FHA/HUD lending outlook feels stronger than ever. Earlier this year, FHA announced higher loan limits in more than 3,000 counties. The organization has also expanded its definition of large loans as a way to speed up the development of multifamily properties. These changes promote greater flexibility for lenders and encourage more affordable housing initiatives.

These changes are a direct impact of tracking emerging trends in the housing market. The last threshold increase was in 2014 at a time when the housing market looked drastically different than it does today.

Overall, commercial developers should maintain a positive outlook for FHA/HUD lending. Multifamily development has been on the upswing in recent months, which means plenty of new units will be available soon. Even so, the ongoing housing shortage underscores the need for more multifamily developments, especially in the face of high-interest rates and listing prices that make homeownership cost-prohibitive for many would-be buyers.

Partnering with Walker & Dunlop for FHA financing

FHA/HUD financing for commercial real estate offers developers and investors an attractive option for funding their housing projects. Loans are more accessible and offer longer terms, lower interest rates, affordability, and stability, not to mention the benefit of contributing to the greater good of society.

Investors, owners, and developers should explore the possibilities offered by FHA/HUD financing. For support in navigating your options, we invite you to connect with our team. Walker & Dunlop is the #2 FHA lender in the country and the #1 overall FHA construction lender. We understand the nuances that make FHA/HUD financing unique and can help you pursue the right loan for your project. Contact our team today to learn more.