As the owner or developer of a multifamily property, you may be considering financing options for your project. Two popular options for multifamily financing are Fannie Mae and HUD loans. While both are government-sponsored programs, they have some key differences that are important to understand before deciding which option is right for your specific project. In this blog, we’ll explore the differences between Fannie Mae and HUD multifamily loans to help you make an informed
decision.
Fannie Mae Multifamily Loans
Fannie Mae is a government-sponsored enterprise (GSE) that provides liquidity to the mortgage market by purchasing mortgage-backed securities. The Fannie Mae multifamily loan program offers a variety of loan options for the purchase or refinance of multifamily properties. These loans are originated by approved lenders and then sold to Fannie Mae, which securitizes the loans into mortgage-backed securities. This process helps to keep the mortgage market liquid and allows lenders to provide borrowers with competitive rates.
Loan Amounts and LTV
Fannie Mae loans are available for loan amounts of $1 million or more and have loan-to-value (LTV) ratios of up to 80%. However, Fannie Mae does not have a maximum loan amount and the actual loan amount is determined by the property’s cash flow and the underwriting guidelines of the lender. In general, Fannie Mae loans have lower interest rates than HUD loans, making them a good option for borrowers looking to save on interest costs.
Credit Requirements
Fannie Mae has strict credit requirements for borrowers and properties. Borrowers must have a minimum credit score of 680, and the property must have a minimum debt service coverage ratio (DSCR) of 1.25x. Additionally, Fannie Mae requires that the property meet certain physical condition standards to ensure that it is safe and habitable.
Prepayment Penalties
Fannie Mae loans have prepayment penalties that can range from yield maintenance to a declining prepayment premium. Yield maintenance is the most common type of prepayment penalty, and it requires the borrower to pay a fee that is equal to the present value of the remaining loan payments. A declining prepayment premium is a prepayment penalty that decreases over time, making it more
expensive to prepay the loan in the early years.
Fannie Mae General Requirements:
Fannie Mae loans are designed to help a wide range of borrowers who are interested in financing multifamily properties. In terms of borrower eligibility, Fannie Mae loans are generally available to both individual and corporate borrowers, as well as to for-profit and nonprofit organizations. When it comes to the properties themselves, Fannie Mae loans are designed to finance a wide range of multifamily projects, including traditional apartment buildings, student housing, senior housing, and affordable housing. The properties may be new construction, rehabilitated or stabilized, and may include properties in smaller cities or rural areas. It is important to note that Fannie Mae has specific requirements for the properties that can qualify for their loans. Some of these requirements include:
- Minimum property size: The property must have at least five units.
- Minimum occupancy: The property must have a minimum of 90% occupancy for the past 90 days.
- Minimum rehab funds: If the property requires rehabilitation, it must be at least $6,500 per unit.
- Maximum loan amount: The maximum loan amount varies by location, but can go up to $100
million or more. - Property type: The property must be a market-rate property, student housing, senior housing, or
affordable housing. - Financial stability: The borrower must have a strong financial history and a minimum net worth of at least 25% of the loan amount.
If your multifamily project meets these requirements, a Fannie Mae loan may be a viable financing option for your needs. However, it is important to consult with a commercial real estate lender to determine the best financing solution for your specific situation.
HUD Multifamily Loans
HUD multifamily loans are issued by the U.S. Department of Housing and Urban Development (HUD) and are designed to provide affordable housing options to low- and moderate-income families. These loans are insured by the Federal Housing Administration (FHA), which means that lenders are protected against losses in the event of default. Loan Amounts and LTV HUD multifamily loans are available for loan amounts of $1 million or more and have loan-to-value (LTV) ratios of up to 83.3%. Unlike Fannie Mae loans, HUD loans have a maximum loan amount that is determined by the property’s value and the underwriting guidelines of the lender. HUD loans also have lower interest rates than conventional loans, making them a good option for borrowers looking to save on interest costs.
Credit Requirements
HUD loans have less strict credit requirements than Fannie Mae loans. Borrowers must have a minimum credit score of 620, and the property must have a minimum debt service coverage ratio (DSCR) of 1.11x. Additionally, HUD loans do not have any physical condition standards, but the property must meet certain safety and habitability requirements.
Prepayment Penalties HUD loans do not have any prepayment penalties, which means that borrowers can prepay their loan at any time without incurring a fee. This can be an attractive feature for borrowers who are looking to sell or refinance their property in the near future.
HUD General Requirements HUD loans have specific requirements that must be met in order for a project to be eligible for
financing. The following are some of the main requirements: - Eligible Borrowers: HUD loans are typically available to both for-profit and non-profit entities, including developers, investors, and public entities such as housing authorities.
- Project Eligibility: HUD loans can be used to finance a variety of multifamily properties, including apartments, assisted living facilities, and nursing homes. The property must meet certain requirements, including being in good condition and having a certain percentage of units designated for low- and moderate-income residents.
- Loan-to-Value (LTV) Ratio: The LTV ratio is the amount of the loan divided by the appraised value of the property. HUD loans typically have a maximum LTV ratio of 85%, which means the borrower must provide a down payment of at least 15%.
- Debt Service Coverage Ratio (DSCR): The DSCR is a measure of a property’s ability to generate enough income to cover its debt obligations. HUD loans typically require a minimum DSCR of 1.11.
- Mortgage Insurance Premium (MIP): HUD loans require borrowers to pay a mortgage insurance premium, which is typically 1% of the loan amount upfront and an additional 0.6% to 1.5% of the loan amount annually.
- Environmental Review: HUD requires an environmental review to be conducted for all projects that receive financing. This review ensures that the project will not have a negative impact on the environment. Overall, HUD loans are a great option for developers and investors looking to finance multifamily properties that meet certain requirements. However, borrowers should be prepared to meet the specific requirements and provide detailed information about their project to be eligible for financing.
Which Loan Option Is Right for You? Deciding between a Fannie Mae or HUD
Interest rates
Another important factor to consider when choosing between a Fannie Mae or HUD multifamily loan is the interest rate. Fannie Mae loans tend to offer lower interest rates compared to HUD loans. The reason for this is that Fannie Mae is a publicly traded company, whereas HUD is a government agency. Therefore, Fannie Mae has to compete with other private lenders, and offering lower interest rates is one way to attract borrowers
Loan Amount and Loan to Value (LTV) Ratio
Fannie Mae and HUD have different loan amount and LTV requirements. Fannie Mae’s maximum loan amount varies depending on the property’s location and the number of units, but it can go up to $100 million or more. HUD, on the other hand, has a maximum loan amount of $100 million, and it requires a minimum LTV ratio of 80%.
Loan Terms and Amortization
Fannie Mae and HUD multifamily loans have different loan terms and amortization schedules. Fannie Mae loans typically have longer loan terms, ranging from 5 to 30 years, while HUD loans have shorter loan terms, typically ranging from 10 to 35 years. In addition, Fannie Mae loans offer flexible amortization schedules, which can be either full-term interest-only or partially amortizing. HUD loans, however, have a mandatory fully amortizing schedule.
Underwriting Process
The underwriting process for Fannie Mae and HUD loans is also different. Fannie Mae loans have a more standardized underwriting process, which can result in faster approvals and closings. In contrast, HUD loans have a more rigorous underwriting process, which can take longer to complete. However, HUD loans may offer more flexibility in terms of credit and other underwriting criteria.
Conclusion
Both Fannie Mae and HUD multifamily loans have their advantages and disadvantages. Fannie Mae loans offer lower interest rates, longer loan terms, and flexible amortization schedules. On the other hand, HUD loans offer higher LTV ratios and may be more flexible in terms of credit and other underwriting criteria. Ultimately, the choice between the two will depend on your specific needs and circumstances. It is important to work with an experienced commercial mortgage broker who can help you navigate the complex process of securing a multifamily loan and choose the option that best fits your unique situation.
