Underwriting Requirements for the HUD 221(d)(4), HUD 223(f), and HUD 223(a)(7) Programs
The underwriting guidelines for FHA multifamily loans are perhaps the strictest on the market today, excluding perhaps underwriting guidelines from life company lenders. These loans do offer long, fully-amortizing, non-recourse, fixed-rate terms, but they require
General underwriting guidelines for HUD/FHA multifamily loans include:
Leverage: 85-90% LTV
DSCR: 1.11-1.18x (for HUD 221(d)(4) and HUD 223(f)
1.11x for HUD Section 8 properties
1.15x for partially affordable properties
1.18x for market-rate properties
Sponsorship: Sponsors or key principals (KPs) must have a net worth of at least 100% of the entire loan amount, excluding their primary residence.
Background Check: Key principals must generally undergo an extensive background check. Those with criminal histories may not necessarily be excluded, but those with criminal histories related to financial fraud are likely to be excluded from the program.
HUD Background Check: HUD Multifamily has its own list of owners, operators, lenders, and service providers (such as appraisers) that have either been suspended or banned from the program. These individuals will not be allowed to participate in the HUD lending process. You can check the HUD Limited Denial of Participation list here.
Credit Scores: Borrowers or sponsors must generally have a credit score of 680+.
Property Condition: Properties must generally be in good condition. HUD 221(d)(4) substantial rehabilitation loans may permit for properties with one or more major property elements (HVAC, roofing, etc.) in need of replacement.
Market Areas: Due to the price limit per unit for HUD multifamily loans, HUD borrowers are generally priced out of major metro areas. In addition, HUD generally prefers to support developments in secondary and tertiary markets where there is more likely to be a need for affordable workforce housing.
Underwriting Documentation for FHA Multifamily Loans
In addition to the general underwriting guidelines for FHA multifamily loans, a variety of third party reports will be required, including:
HUD Multifamily Appraisal: A full appraisal must be conducted by a HUD-approved property appraiser. This will include:
Basic Property Information, including:
Project size and type
Property address
Number of units/buildings
Structural foundation and basement floor data
Basement floor information
Existing or planned recreation areas
Neighborhood information, including:
Prospective area growth rate
Demand supply of units, locally
Urban, rural, or suburban area classification
Average local property values
Local vacancy rates
Current area land use
Rental price controls in the area, if applicable
Site information, including:
Zoning compliance (legal, illegal, legal non-conforming (grandfathered))
Dimensions
Market rent plans (including affordable unit and income-related unit pricing data)
Other property information, such as:
Purchase price
Aquisition date
On-site utilities
Additional site features (particularlly unusal ones)
Buyer/seller relationship, if any
Unit rating, including factors such as:
Overall livability and marketability
Room size and layout
Closets and storage rating
Electrical quality
Plumbing rating
Soundproofing quality
Project rating, including factors such as:
General appearance
Amenities and recreational facilities
Density (units per acre)
Unit mix
Quality of construction
Condition of exterior
Condition of interior
Vertical and horizontal soundproofing
Maintenance costs, such as:
Repairs
Exterminating
Insurance
Ground expense
Decorating
Operating costs, such as:
Lighting and misc. Power
Water
Gas
Elevator costs
Fuel (heating and hot water)
Garbage and trash removal
Payroll
Tax costs, such as:
Real estate, based on the estimated assessed value
Personal property, based on the estimated assessed value
Employee payroll taxes
Property Condition Assessment/Physical Needs Assessment: This assessment will review and deferred maintenance that may need to be addressed.
HUD Market Study and Report:
General factors analyzed in a HUD-approved market study include:
Estimation of market value/market need
Current residential and commercial rents in the local area
Project expenses and estimated income for the subject property, in the context of it providing collateral for a HUD-insured mortgage
Market condition factors analyzed include:
Estimated absorption time
Specific market conditions
Geographic boundaries of the market area
General characteristics of the market area
Supply and demand estimate
Detailed Operating Statement and Underwriting Analysis:
Income Streams:
Tenant Rents
Parking fees
Laundry and vending
Commercial rents from tenants (if the building has any)
Late/NSF (non-sufficient funds) fees
Application fees
Tenant charges
Storage fees
Cable TV
Utility reimbursement (net)
Operating Expenses:
Maintenance, including:
Elevator
Decorating
Repairs/building maintenance
Trash
Exterminating/pest control
Parking/snow
Supplies
Cleaning/turnover
Utilities, including:
Fuel
Gas
Electricity
Water and sewer
Payroll, including:
Manager salary
Manager housing allowance (if applicable)
Maintenance salary
Caretaker salary
Caretaker housing allowance (if applicable)apt. Allowance
Additional salaries
Commissions/bonuses
Benefits, including insurance
Payroll taxes
Worker’s compensation insurance
Administrative costs, such as:
Advertising
Telephone
Legal/audit
Professional fees
Office expenses
Corporate expenses
Licenses/dues
Model apartments for leasing purposes
TDHCA compliance
Management fees
Commercial expenses
Underwriting Guidelines and Documentation for HUD 221(d)(4) Loans
In addition to the general documentation above, HUD 221(d)(4) loans require additional documentation related to the construction process, including:
HUD Approved Architectural and Engineering Report:
Pre-Approval Including:
Form HUD-92013, Application for Project Mortgage Insurance
Location map with property clearly defined.
Sketch plan of the site showing overall dimensions of main building(s), major site elements, e.g. parking lots, and location of existing utilities, e.g. water, sewer, electric, gas, in the streets adjacent to the site. It's not necessary to show contour lines and elevations.
Sketch plans of the main building(s), including dimensions of:
Typical floor plan(s) showing apartment types and placement;
Ground floor plan(s) showing common areas;
Sketch floor plan(s) of typical dwelling unit(s); Typical wall section(s) showing footing, foundation, wall, and floor structure. Notes must indicate basic materials in the structure, floor, and exterior finish. This must allow a HUD architectural analyst to determine the Gross Floor Area for the project and the Net Rentable Areas for all the apartment units in the project.
Firm Stage, including:
Form HUD-92013, Application for Project Mortgage Insurance.
Owner-Architect Agreement, AIA Document B-181 (and HUD Amendment to the B181 where required), which defines the services and fees for each prime professional that the borrower/owner directly contracts. Additional contracts must be submitted for any part of the basic design services with more than one prime professional, e.g. for the site, civil, mechanical, electrical engineering services, etc., or supervisory architectural services. The borrower's architect has the authority to coordinate multiple prime professional contracts.
Legal survey: Completed Surveyor’s Report, Form HUD-2457.
Engineering and specialty reports, e.g. geotechnical, environmental, noise, flood hazard, toxic hazard, termite control, structural integrity (for Existing or Substantial Rehabilitation projects), heat gain/loss calculations, etc.
Municipal and utility company letters of confirmation for the provision of services and/or offsite improvements.
Additional Documents, including:
Site ingress and egress, utilities service and other general acceptability criteria in MPS 4910.1, Chapter 2. 03/15/2002 Page 10 of 32 Chapter 5 Architectural Analysis
Binding maintenance agreements where common use easements (e.g. driveways) are used.
Certifications from borrower's architect that:
Foundation designs reflect site soils limitations and design recommendations included in the foundation soils report and any other geotechnical reports (may be submitted by soils engineer);
All project structures, amenities, and site improvements are in full compliance with all applicable accessibility laws.
Description of any identity of interest that exists between the prime professional providing supervisory architectural services, the owner, and the general contractor.
Contract drawings and specifications. (See Appendix 5I)
Offsite Construction: Describe all work outside the boundaries of the property essential to the project (See Appendix 5I, Paragraph S).
Phase 1 Environmental Assessment
Phase 2 Environmental Assessment (if contamination discovered in Phase 1)
Seismic Report (in certain states)
In addition to these reports, a property must undergo regular construction audits in order to keep receiving their loan disbursements during the construction period.
Underwriting Guidelines for HUD 223(f) Loans
Property underwriting guidelines for HUD 223(f) loans for multifamily acquisitions and refinancing are almost identical to those of HUD 221(d)(4) loans. However, they do not include construction-related reports, as the program only allows for light repairs.
Specifically, eligible properties for the HUD 223(f) program must be, at minimum, 3-years old. Properties that have recently undergone significant renovation must have undergone those renovations (with full completion) at least three years before the potential purchase date. Minor repairs and small upgrades are permitted.
Underwriting Guidelines for HUD 223(a)(7) Loans
HUD 223(a)(7) is used to refinance existing FHA/HUD-insured loans. Only multifamily and healthcare properties with existing HUD-insured debt are eligible. The loan term may be extended up to 12 years. The new term cannot exceed the initial loan term.
The only third-party report required by HUD is a PCNA (project capital needs assessment). It is required both during the application process and every 10 years.