Purchasing or Refinancing an Existing Multifamily Property? Consider FHA

July 13, 2017

 

People tend to associate the Federal Housing Administration (FHA) with home loans, but this isn’t all they do. The FHA also backs and insures multi family properties.

 

“So you’re saying the FHA offers a full guarantee of repayment to lender if the borrower were to default on a $35 Million loan?”

 

That is exactly what I am saying.

 

“Wait up. In the residential market, homeowners usually benefited from a higher LTV with a FHA loan. That can’t be the case on massive commercial deals, right?”

 

That actually is the case with these multi family properties. The FHA will lend up to87% LTV on the purchase, 90% LTC, and will go down to a DSCR of 1.17. These loans are also 35-40 year terms, full amortizing, and are non-recourse.

 

Another thing to take into account is that these loans are assumable. Being able to transfer loan terms to someone with our current market conditions is an extreme advantage. Locking in a low rate in today’s market could prove extremely attractive for a prospective buyer years down the road when rates might be a lot higher.

 

Let’s compare that with an average multifamily loan from a local bank. Banks will most of the time max out at 75% LTV, require a minimum DSCR of 1.25 and have 5-7 terms that balloon at the end of the term.  

 

Now with just those details, one might question why someone would ever not get an FHA Multifamily Loan. Well just like with the residential FHA loans, the multifamily loans have their stipulations.

 

What are these stipulations?

 

  1. FHA loans require a lot more time than the other types of loans. While a traditional loan on an apartment building takes 30-60 days, you can expect a FHA purchase to take 3-4 months.

  2. These loans will have a lockout period averaging 2 years, but can change depending on the scenario. What this means is that during the first 2 years of the loan, you cannot payoff the loan.

  3. These loans will also almost always have an 8 year step down prepayment penalty set up. After the lockout period, the prepayment penalty will start at 8%, decreasing by 1% every year until year 10. After this point there is no penalty to pay off the loan or refinance out of it.

  4. Just like in the residential world, an FHA loan comes with paying Mortgage Insurance Premium (MIP). This fee consists of .5 - 1% of the loan amount due at closing, and an additional annual fee of between .25% and.6% of the loan amount.

 

So when should someone get an FHA Multifamily loan, and when should someone not get one?

 

When You Should:

 

  • If you are not in a rush to close

  • If you want access to higher amount of funds

  • If you plan on holding on the loan for at least 2 years, preferably more.

  • If you want to lock in a long term rate and term.

 

When You Shouldn’t:

 

  • If you have a timeline of less than 60 days

  • If you plan on this being a short term endeavor.

  • If you can afford to put down additional funds

 

If you are in the market to refinance or purchase a multifamily property, request a consultation with us at The Sound Mortgage. We can assist you in identifying if you can benefit from a FHA loan, clarify the process, and help secure funding for your property. 

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