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HUD Apartment Loan

in Minneapolis

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HUD apartment loan in Minneapolis St. Paul, Minnesota 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.

Minneapolis Economic Update for Apartments as of June 2024.

  1. The rise in single-family housing costs coincided with the return of net in-migration to the metro for the first time since 2019.
  2. Net absorption nearly kept pace with an all-time high delivery slate over the 12 months ending in March.
  3. Higher levels of concessions usage helped market-wide Class A vacancy dip by 10 basis points year-over-year.
  4. In the more affluent suburbs of Eden Prairie-Shakopee-Chaska, Minnetonka, and Bloomington, the portion of units offering concessions grew by over 300 basis points.
  5. New supply is moderating in the CBD, with signs that vacancy will begin to stabilize in Downtown Minneapolis-University.
  6. Nearly 45 percent of the 1,500 units slated to come online in the submarket during 2024 were delivered in the first quarter.
  7. The local pipeline beyond 2024 falls to a sparse 220 units as of March.
  8. Inventory growth slows to a half-decade low of 2.2 percent in 2024, with only 4,400 units slated for delivery after 2024.
  9. The market-wide average effective rate is expected to rise to $1,576 per month in 2024, becoming almost 17 percent higher than the year-end 2019 level.

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 Minneapolis. 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 Minneapolis:

  • 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
      3% – 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) 1.17x.  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 Minneapolis 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 Minneapolis can be found on Caffreyloans website.

For a free loan quote for your HUD loan in Minneapolis 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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