What to Look for in a HUD Multifamily LenderBrian Hansen
Every experienced multifamily investor knows that most commercial mortgages run for a 10-year term with a balloon payment due at maturity. This sets the stage for needing multiple refinance transactions throughout the life of the loan until the property can be paid off, while continuing to generate maximum cash flow. The cost and amount of effort to refinance every decade can be a significant use of resources over the life of the mortgage.
Look at recent history, and put yourself in this situation: what if, in 2009, you had a forced refinance and balloon payment come due—when the capital markets were frozen after the housing bubble burst, and the stock market collapsed? There were many investors who faced this situation and lost equity and in some cases their properties because of the economic circumstances, not through any fault of their own. The absence of forced balloon payments and multiple refinancing’s are some of the most significant financing benefits with HUD permanent financing.
Here are the benefits of HUD financing:
- Low interest rate
- Fixed interest rate
- High-leverage debt
- Fully non-recourse
- Long-term financing (up to 40 years)
While it is true that the application and approval process for commercial HUD multifamily loans takes longer than with conventional banking, potential investors should consider and balance-out the many benefits that HUD loans offer over bank loans. Investors should likewise give thoughtful consideration to selecting a firm that is seasoned as a HUD mortgager with which to secure your HUD approval and funding. Here are some factors you might not have considered when it comes to deciding which firm you’ll work with.
Focus of the Firm
It’s no secret that many of the HUD-licensed, MAP-approved lenders are actually the biggest nationwide banks. What may not be widely known, however, is the focus of those bank lenders. Banks secure core deposits from their clients for which they pay very low interest rates. The bank’s primary focus is to sell bank products that fund from their own deposits. Banks have a HUD desk because they have clientele that absolutely require a HUD loan, but their preference would be to sell their customers a more profitable “bank loan”. An independent, non-bank firm that focuses on commercial HUD loans as their primary product is better positioned to tailor a loan that fits better to a client’s unique needs. Because independent firms can’t sit back and expect the bank’s clientele to come to their HUD desk, they’re forced to focus on building a solid reputation from satisfied clients and their commitment to excellence can deliver a superior client experience.
A Consultative Approach
There are many guidelines and requirements that must be followed to secure a successful HUD approval and funding. Having your loan officer use a consultative approach is one of many contributing factors that will provide you with a satisfying client experience. A developer often needs assistance in assembling the right team, players that have a successful resume of completed HUD deals. The question to ask yourself is: Don’t I want to work with someone who will analyze my pro formas, test my conclusions and carefully evaluate my plans, then offer me the best professional advice that aligns with my needs? You are entitled to this kind of experience as you finalize the project and prepare for a concept meeting.
Once you’ve finalized your concept, you’ll be required to go through an underwriting review and be approved by a credit committee before you can apply directly to HUD. The members of a bank’s credit committee are nameless, faceless board members that make their decision, from behind large mahogany doors, based solely on the loan package, the conclusions and opinion of the underwriter. At an independent firm, it is more likely that the credit committee will consist of fewer people who are accessible to the client before any decision is made on your deal. In this independent approach, you can even request a meeting with the members of the credit committee and have the opportunity to connect with and impress them with your resume and presentation as well as respond to any questions they might have.
Ginnie Mae Issuer and Servicer
When a firm is authorized by HUD to service their loans, it indicates that the firm has undergone a rigorous process review and onsite auditing by HUD personnel. Once a HUD loan is funded, the mortgage is securitized by Ginnie Mae and the security is sold from a single asset pool. Each mortgage becomes a bond to be sold on the market. A firm that is a Ginnie Mae Issuer handles this process. Firms that do not issue the security generally charge higher fees because they incur an additional cost to contract with a firm that can issue the security. To save fees and eliminate extra steps, look for a firm that originates, has in-house (local) underwriting, will service your loan for the length of its life, and will place your securitized loan in the Ginnie Mae market.
Commitment to Excellence
When you’ve made contact with a potential firm, ask yourself the following questions: Was the person you talked to excited to speak to you? Did they take a serious interest in understanding all aspects of your project, your motivation, your vision of the finished project? Did they listen to every concern, answer your questions, devote enough time to completely understand your needs? Have you been contacted personally by a member of senior management who introduced themselves, assured you of the firm’s commitment, and given you their contact information in case you had any unresolved concerns or questions?
Do you have to constantly chase after your loan officer to get updates and move your deal forward? Or perhaps you feel like you’re just one of many deals they’re working on rather than an important client? A professional loan officer will take the lead in helping move your deal through the various steps in the process.
If you’re not experiencing some level of red-carpet treatment, you should probably continue your search for a firm that makes you their priority. Remember, during the process of securing financing for your project, you will have multiple conversations and be working with your contact for several months, and, on a new construction project, it will be over the better part of a year. Given the length of time and importance of this relationship, you should work with someone that is responsive, eager to earn your trust and keep your business.
During this current period of historically low interest rates, locking up your cash-flowing property for 35 to 40 years in a maximum-leverage scenario and without having to face forced refinancing is the gold standard of multifamily investing. Investors who really understand this have come to know which process makes the most sense, is more effective and financially efficient, and spend their time and resources adding properties to their portfolio and profit to their company. Are you ready to do the same?