If you have ever financed a residential property with an FHA loan, you know what the PMI is. If not, PMI stands for (Private Mortgage Insurance). Like most insurance policies, PMI has a monthly premium that is collected by the insurer. Mortgage insurance assures the lender (investor) will be repaid the money the lend out.

FHA loans are backed by the full faith and credit of the federal government. However, FHA is not the lender; they are the insurer. Because of this they do not collect any revenue from the mortgage. The insurance premium is the compensation they receive to provide repayment insurance.

FHA provides mortgage repayment insurance for both residential and commercial dwellings. On the residential side this includes single family homes, duplex, triplex and fourplexes. Once you reach 5 units in multifamily, you cross over into a commercial classification, thus requiring a commercial mortgage product.

For commercial multifamily mortgages, the insurance premium is referred to as the MIP (Mortgage Insurance Premium). While the name and manner of implementation are different, the effect and purpose are the same.

U.S. Department of Housing and Urban Development (HUD) HUD’s mission “is to create strong, sustainable, inclusive communities and quality affordable homes for all”. The insured mortgage from HUD, through the FHA provides affordable mortgage contracts to consumers and investors of commercial multifamily properties which support apartment inventory to consumers. The fact that the mortgage repayment is insured makes FHA commercial mortgages ideal investment vehicles to the capital markets. Individual mortgages are bundled together into larger securities (or bonds) and sold to investors. This provides liquidity to the mortgage markets and is what makes mortgages readily available.

The interest rates on commercial multifamily FHA financing are among the very lowest in the commercial multifamily market segment. Typically, the difference is very close to a full percentage point lower than the GSEs: Fannie Mae & Freddie Mac (commonly referred to as the Agencies). Even with the cost of the MIP added into the final payment calculation, the all-in rate and payment of FHA loans beat the Agencies.

The Annual MIP

Calculating the annual MIP payment schedule isn’t as simple as adding it to the underlying note rate. Using that logic, you would dramatically overstate the amount you would pay over the life of the loan. The monthly premium is calculated on an average outstanding principal balance over the current year. The MIP rate (25 basis points for instance) will never change, but the amount it is multiplied by is decreasing annually because of amortization. As the loan amortizes, the principal balance declines and in turn the MIP payment declines as well.

The annual MIP rates for construction-to-permanent projects under the FHA 221(d)(4) program:

• 25 bps for Broadly Affordable Rent (90%+ LIHTC or HAP Section 8 Rental Assistance)
• 25 bps for Green/Energy Efficient Housing
• 35 bps for Affordable Rents (10%-90% LIHTC or HAP Section 8 Rental Assistance)
• 65 bps for Market Rate properties

The annual MIP rates for a purchase or refinance under the 223(f) program are the same with one exception on market rate properties:

• 25 bps for Broadly Affordable Rent (90%+ LIHTC or HAP Section 8 Rental Assistance)
• 25 bps for Green/Energy Efficient Housing
• 35 bps for Affordable Rents (10%-90% LIHTC or HAP Section 8 Rental Assistance)
• 60 bps for Market Rate properties

The Upfront MIP

The upfront MIP premium is the fee collected by FHA at loan closing for all the time and effort spent by FHA from the concept meeting & pre-application to final application, approval & closing. These commercial mortgages are much more in depth and labor intensive than a residential mortgage and this is how the FHA staff are paid to execute the entire process.

The upfront MIP rates on the FHA 221(d)(4) program:

• 50 bps for Broadly Affordable Rent (90%+ LIHTC or HAP Section 8 Rental Assistance)
• 50 bps for Green/Energy Efficient Housing
• 70 bps for Affordable Rent (10%-90% LITHC or HAP Section 8 Rental Assistance)
• 130 bps for Market Rate

The upfront MIP rates for the 223(f) program are:

• 50 bps for Broadly Affordable Rent (90%+ LIHTC or HAP Section 8 Rental Assistance)
• 50 bps for Green/Energy Efficient Housing
• 70 bps for Affordable Rent (10%-90% LIHTC or HAP Section 8 Rental Assistance)
• 100 bps for Market Rate

The structure and terms for commercial multifamily FHA financing are the most compelling in the industry and provide a level of certainty to the investor that can’t be found under any other program, period. They include; up to a 35 or 40 year term, fixed note rate for the life of the loan, are fully amortizing (no forced refinances or balloon payments), utilize the highest leverage and are fully non-recourse. Professional multifamily investors would be wise to fully evaluate an FHA loan before closing any commercial mortgage. Don’t get hung up on the MIP and miss out on all the benefits of FHA permanent financing.