HUD Updates Open Doors for Developers
Rule changes provide higher proceeds and greater flexibility, writes Greystone's Barry Wolfson.

A new incremental change in HUD rules can increase loan proceeds for developers of new multifamily communities or those refinancing existing properties.
The rule changes can close the gap a little, in terms of the equity borrowers need, making HUD loans a bit easier for developers. The changes, which went into effect on Jan. 8, apply to all loans that haven’t yet closed. This includes developers that already have a commitment for a loan—the new formula and loan amount applies without changing pricing.
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New calculations for HUD multifamily loans
Two mathematical equations that impact borrowing options have been adjusted by HUD with the goal of increasing availability of HUD financing: the loan-to-value for refinancing or loan-to-cost for new developments and the debt service coverage ratio.
Financing for affordable developments using Low Income Housing Tax Credits will increase from 87 percent to 90 percent LTV/LTC and the DSCR drops from 1.15 to 1.11. Financing for market rate developments or multifamily communities using LIHTCs without a rent advantage will increase from 85 percent to 87 percent LTV/LTC and the debt service coverage requirement changes from 1.176 to 1.15.
The net result is that borrowing amounts increase by approximately 2.6 percent for market-rate deals. The big difference is for new construction, because competitors for HUD financing—including banks and insurance companies—are currently lending at around 65 percent of cost.
In theory at least, HUD was lending up to 85 percent on market-rate new developments before the rule change and 87 percent under the new rule. Unfortunately, high interest rates and the debt service coverage requirement result in loans coming in more often at 70 percent to 80 percent, at most.
Developers are still tasked with coming up with significant equity, but the HUD debt service coverage change is an improvement from what was previously in place. The increase can make it easier for developers to actually get to the place where they have enough money to close the deal.
The LTV/LTC and debt service coverage formula remains unchanged for financing for buildings with 90 percent or more units designated for tenants using rental assistance.
Another element of the HUD multifamily loan program that is not changing is the minimum underwriting vacancy factor, which ranges from 3 percent for developments with 90 percent or greater units with rental assistance to 5 percent for properties using LIHTCs and a rent advantage to market to 7 percent for market-rate communities.
More options for HUD multifamily financing
HUD also announced a new category of FHA-insured mortgage loans on properties where at least 50 percent of the rental units are targeted to individuals and families with incomes at or below 120 percent of the AMI. The new set of underwriting thresholds for the development of “middle income” rental housing responds to market needs using the existing FHA 221(d)(4) loan program.
The new HUD formula for debt service coverage and loan-to-value for properties that meet these requirements could allow borrowing increases of as much as 6 percent. This is a gamechanger and significantly increases the borrowing power for many developers.
In roughly three-quarters of the markets in the country, rent levels produced for 120 percent AMI would be at or above market rates. It’s not much of a restriction, especially since 50 percent of the rents would be market-rate.
The changes are intended to increase financing flexibility for lenders and developers seeking to create new or refinance existing affordable multifamily rental properties and create new—or substantially rehabilitate—properties for “middle income” individuals and families.
As Greystone’s chief FHA underwriter, Barry Wolfson is responsible for reviewing concept packages and underwriter narratives on all Greystone applications submitted to HUD.