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HUD apartment loan

in San Jose

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HUD apartment loan in San Jose, California 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 health of the multifamily market in San Jose. This is what HUD will see as well. HUD Apartment Loan in San Jose 2024 Market Information:

  1. The San Jose metro area’s multifamily sector is expected to experience growth in 2024. It is projected that 10,000 jobs will be created, and 3,100 new units will be developed.
  2. There will be a 20-basis point increase in vacancies, reaching 1.0%.
  3. The Tech sector in San Jose faced challenges with layoffs, particularly in professional and technical service roles. However, there has been a positive trend with a job tally increase of over 1,000 positions in the first three months of 2024.
  4. Employment growth has been sustained in healthcare, entertainment, and local government sectors, supporting household formation and rental demand.
  5. Vacancy rates fell year-over-year in Santa Clara and North Sunnyvale, signaling positive momentum for the 3,900 apartments currently under development in these submarkets.
  6. Expectations for fewer new completions in Central San Jose and South Sunnyvale in 2024 suggest improved property performance in these areas.
  7. Vacancy rates remain unchanged from the previous year in South Sunnyvale-Cupertino, and the rate of vacancy increase has slowed in Central San Jose.
  8. The overall employment base is set to grow by 0.3 percent in the first three months of 2024, indicating a modest but positive labor market outlook.
  9. North Sunnyvale and Santa Clara are expected to be the focal points for development in 2024, with an increase in deliveries compared to last year.
  10. The metro-wide vacancy rate is expected to reach 4.8% by December, slightly higher than the previous year but still lower than the pandemic peak.
  11. Despite elevated vacancy rates, net absorption is improving, leading to a projected increase in rent prices to $3,036 per month by the end of the year.
  12. The number of apartments completed in the 12 months ended in March was lower than the previous year, indicating a slowdown in construction activity.
  13. North Sunnyvale and the West San Jose-Campbell area saw the most significant growth in local inventory over the past four quarters, adding nearly 900 new units.
  14. The market-wide vacancy rate remained at 4.6% in March, with Class A and B measures showing drops offset by an increase in the Class C mark.
  15. While the average effective rent has shown a slight decline, it is still slightly higher than the 2023 year-end rate. Additionally, rent growth has been notable in North Sunnyvale and South San Jose.

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 San Jose. 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 San Jose:

  • 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.
    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 San Jose 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 San Jose can be found on Caffreyloans website.

For a free loan quote for your HUD loan in San Jose 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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