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HUD Apartment

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HUD apartment loan in Charlotte North Carolina is an attractive option for the investor, with a long-term hold mindset.  Let’s look at some of the benefits and disadvantages of the HUD 207/233(f) loan product.  The main attractions are higher leverage, non-recourse, assumable, can reset interest rates, lower debt service coverage ratio, and a 35-year amortization.

Charlotte Economic Update for Apartments as of June 2024.

In Charlotte this year, there has been a lot of new apartment construction and an increase in the number of people living there. This means that there are more apartments available for rent, leading to higher vacancy rates. To attract tenants in this competitive market, many landlords are offering special deals on rent. Because of this, the average rent in the area has gone down over the past two quarters.

In the first three months of the year, there were fewer permits issued for new construction projects in Charlotte. This suggests that future construction may slow down. Despite this, Charlotte is expected to see an influx of about 142,000 new residents over the next five years.

Migration into the city:

A lot of young professionals are moving to Charlotte, partly because of new companies setting up headquarters in the area and the growing enrollment at the University of North Carolina. As a result, there is a growing number of people aged 20 to 34, who are more likely to rent homes.

Looking ahead to 2024, it is expected that the number of new apartments will nearly match last year’s total, with most of the new units being built in and around Uptown, South End, UNC, North, and Southwest Charlotte. However, due to the high supply of new apartments, the vacancy rate is projected to increase to 8.0 percent by the end of the year. As a result of this increased supply, the average rent is expected to decrease to $1,530 per month by December, marking the second consecutive year of decline. Nonetheless, this amount is still 30 percent higher than the average rent in 2019.

What is the HUD 223(f) loan product?

Section 207/223(f) insures mortgage loans to help with buying or refinancing existing multifamily rental housing in Charlotte. These projects may have been originally financed with either conventional or FHA-insured mortgages. Properties that need major rehabilitation are not eligible for mortgage insurance under this program. HUD requires critical repairs to be completed before the mortgage is approved and allows non-critical repairs to be completed after the mortgage is approved for insurance.

Benefits of a HUD apartment loan in Charlotte:

  • The Amount Based on Value.  The applicable percentage of the estimated value of the property after completion of repairs and improvements.
    1. 90% – for Section 202 & 202/8 Direct Loans
      87% – for projects with 90% or greater rental assistance
      85% – for projects that meet the definition of Affordable Housing
      83% – for market-rate projects
  • Loans are fully assumable.
  • These loans are considered non-recourse loans subject to limited recourse covering areas such as borrower fraud, misappropriation of proceeds, environmental, etc.
  • Fixed interest rates can be fixed on existing multifamily properties for 35 years. Under another program, HUD can finance construction loans for a construction term plus 40 years.
    1. Interest rates for 35 years typically are lower than Fannie Mae and Freddie Mac. Neither Fannie Mae of Freddie Mac offer 35-year amortizations.
    2. Unlike Fannie Mae and Freddie Mac should interest rates decrease over the life of the HUD loan the borrower can request a loan modification and obtain a lower rate on the loan.
  • The Debt Service coverage. For market-rate apartments the debt service coverage ratio (DSCR) 1.15x.  Compare this to Fannie Mae and Freddie Mac with required ratios from 1.25 to 1.30.  If the subject property qualifies for Affordable or for the Rental Assistance Program the DSCR falls to 1.11.  These lower DSCR can increase the amount of loan dollars.
  • Cash out refinancing the same loan to value and DSCR apply without adjustment. Look how Fannie Mae and Freddie Mac both reduce the maximum loan to value by 5% for substantial cash out.
  • You might have heard properties coming out of new construction have to wait three years after the issuance of a Certificate of Occupancy has been issued before refinancing into a HUD 223(f) loan. This restriction has been lifted and properties can immediately seek HUD financing without the three year wait.
  • HUD also modified the number of times the investors can take distributions. Did you know in recent past, investors using this loan product could only take distributions from the property twice per year.  Now the investors can take distributions without restrictions.

Downside to HUD Loans:

  • The number one complaint is the loan length of time to close. For an acquisition or refinance it typically takes about 7 months.  It is possible to shorten to six months and sometimes closing can go beyond 7 months.
    1. When buyers wish to utilize HUD 223(f) we work with bridge lenders. This bridge loan allows the buyer to complete the acquisition and allow for the extra time it takes to close and fund the HUD apartment loan in Charlotte or in any city.
  • Closing costs can run higher than Fannie Mae or Freddie Mac.
    1. Lender loan fee 1.0% (most often includes our fee)
    2. HUD Application 0.30%
    3. Processing Fee: $7,500
    4. Appraisal $5-$8,000
    5. Phase Environmental Report $5,000
    6. Mortgage Insurance Premium 25-60 basis points for the life of the loan.
  • Annual HUD Audits. This includes a financial audit and compliance with HUD rules.
  • Replacement reserves. HUD collects the first-year replacement reserves at the loan closing.  Fannie Mae and Freddie Mac normally start collecting these with the first payment and are not front-loaded as required by HUD.
  • Loan size. While HUD can go down to $3 million most HUD lenders require $5 million or more.  Additionally, the added expenses to close and annual audits can eliminate the financial advantages of a HUD loan compared to Fannie Mae or Freddie Mac.
  • When will the final interest rate be determined? Not until a day or so before funding (Loan Closing).  As mentioned above it takes months before the loan closes and the rate Current interest rates for HUD loans for Apartments in Charlotte can be found on Caffreyloans website.

For a free loan quote for your HUD loan in Charlotte contact Mike Caffrey:  [email protected]

On our web site you can read about specific loan products: www.caffreyloans.com/loan-products, offered by Freddie Mac, Fannie Mae, HUD/FHA, Commercial Mortgage Back Securities (CMBS) and other loan products. Want more details on sample interest rates for apartment check out Interest Rates for Apartment Loans also on our web site: www.caffreyloans.com/apartment-loans.

Have a question please contact
Mike Caffrey
Telephone: (913) 402-7077
[email protected]
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