What is MIP in HUD Multifamily Loans?Brian Hansen
Mortgage Insurance Premium, commonly referred to and abbreviated as MIP, is something unique to FHA Multifamily loans. The Federal Housing Administration (FHA) is a division within the U.S. Department of Housing and Urban Development (HUD). The purpose of the FHA is to provide mortgage insurance on loans made by FHA-approved lenders throughout the United States.
FHA insures both single family and multifamily properties. In the multifamily commercial world these loans are commonly referred to as HUD loans. Technically, HUD is not the lender, they are only the insurer of the loans. In other words, the companies that originate the loans are the lenders, and HUD through the FHA makes sure the loans meet the criterion to qualify for the full faith and credit of the federal government.
The point is that because HUD doesn’t generate any revenue from the interest of the loan, they do need to collect a premium, just like any insurance company would. The principle behind insurance is that many individuals or companies contribute a small amount to guard against any catastrophic losses. It is the exact same premise with HUD insuring the multifamily loans.
Thus, the need for MIP. In the commercial multifamily side of FHA, the current structure is that the MIP lasts for the duration of the loan. It is also a fixed amount. For example, the MIP rate on a 221(d)(4) loan is 65 basis points (.65%) for a market rate project. Market rate meaning prevailing rents are charged. Affordable project (4% tax credits subsidized) have a reduced MIP rate of 35 basis points. The purpose here isn’t to list all the different MIP amounts; however, it is material to note they do vary based on the loan type.
As noted, MIP lasts for the duration of the loan and it is a fixed rate. The amount you actually pay does decline over time because the MIP payment is based on the outstanding principle balance of the loan. As the loan amortizes, the principle balance declines and in turn the MIP payment declines as well.
Most people want to minimize the amount they pay and may shy away from an FHA because of the MIP. If so, it is likely a uniformed decision because there are benefits of this mortgage insurance. Because the loans meet the HUD underwriting criteria and receive this insurance, there are many features to this loan that make it unique and incredibly attractive.
The features include interest rates below conventional rates by .5% – 1%. They are non-recourse loans. The Debt Coverage Ratios (DCR) are lower and Loan To Values (LTV) are higher than any other commercial multifamily loans in the country. This means multifamily investors and developers can reduce their own exposure, maximize their cash on cash returns and preserve capital for additional projects thus allowing them to control more real estate.
A real estate investor that is unfamiliar with commercial multifamily HUD mortgages may not know the significant advantages they have over conventional bank or even agency loans. First HUD commercial multifamily mortgages offer the highest leverage percentages in the market, that means you control more real estate with less cash out of pocket. Second, HUD loans also have the longest fixed rate terms available, up to 35 – 40 years, which means no forced refinancing with balloon payments. Third, the HUD fixed rate is even lower than what is offered by conventional bank or agency loans. Fourth, HUD loans are fully Non-Recourse, meaning only the property can be used as collateral in the event of default.