HUD apartment loan in Philadelphia, Pennsylvania 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.
Let’s take a look at the Philadelphia Multifamily 2024 Market Information:
- In 2023, Philadelphia experienced strong net absorption with over 4,700 newly occupied units.
- Despite record-high deliveries in 2024, Philadelphia is expected to maintain one of the lowest vacancy rates in the country.
- Most construction activity in 2024 is focused in and around downtown Philadelphia, leading to supply pressure in these areas.
- Center City in Philadelphia saw an increase in inventory of more than 18 percent since 2019, resulting in the highest vacancy rate among the metro’s submarkets at 6.2 percent.
- Suburbs of Philadelphia, such as Montgomery and New Castle counties, and South New Jersey suburbs, experienced notable population gains due to in-market migration.
- Burlington County claimed the lowest vacancy rate in the metro at 3.2 percent in March, with limited construction expected to keep local vacancy tight long term.
- Montgomery County may also see a similar trend as it hosted the largest number of residents commuting into Philadelphia last year.
- Active home listings in Philadelphia have remained below 10,000 for the last year, contributing to the tight rental market.
- Deliveries of new units in Philadelphia are expected to reach a 25-year high in 2024, with Center City accounting for nearly 45 percent of these new units.
- Philadelphia is forecasted to record the smallest vacancy rate increase among major Northeast metros, reaching 4.7 percent by the end of 2024.
- The average effective rent in Philadelphia is projected to reach $1,834 per month by the end of 2024, a 32 percent increase from 2019, marking a new all-time high in the metro.
- Total employment in Philadelphia is expected to increase by 0.8 percent in 2024, with a slowdown in trade, transportation, and utilities hiring being a contributing factor.
- In the first quarter of 2024, vacancies in Philadelphia increased to 4.8 percent, driven by a 20-basis-point increase from the fourth quarter of 2023.
- Class C apartments in Philadelphia recorded the lowest vacancy rate at 3.9 percent, while Class A and B assets had rates of 6.0 and 4.8 percent, respectively.
- Total inventory in Philadelphia expanded by 2.3 percent over the trailing 12 months ended in March 2024, the largest increase since at least 2000.
- Center City, Northeast, and Northwest Philadelphia accounted for more than half of all units completed during the yearlong span, with Center City alone welcoming more than 2,470 apartments.
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 Philadelphia. 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 Philadelphia:
- The Amount Based on Value. The applicable percentage of the estimated value of the property after completion of repairs and improvements.
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.
- Interest rates for 35 years typically are lower than Fannie Mae and Freddie Mac.
- Neither Fannie Mae of Freddie Mac offer 35-year amortizations.
- 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 waiting period.
- HUD also modified the number of times the investors can take distributions. Did you know in the 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.
- 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 Philadelphia or in any city.
- Closing costs can run higher than Fannie Mae or Freddie Mac.
- Lender loan fee 1.0% (most often includes our fee)
- HUD Application 0.30%
- Processing Fee: $7,500
- Appraisal $5-$8,000
- Phase Environmental Report $5,000
- 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 Philadelphia can be found on Caffreyloans website.
For a free loan quote for your HUD loan in Philadelphia 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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