By Adrian Hartman
5 Insider Tips for HUD Deals
Be prepared for a rigorous underwriting process
Tight credit conditions recently have prompted scores of mul- tifamily and health-care property owners and developers to flock to
loan-insurance programs offered by the
U.S. Department of Housing and Urban
Development’s (HUD’s) Federal Housing Administration (FHA). In the fiscal
year that ended this past September,
the agency issued $15.7 billion in these
loan commitments, an increase from
$14.4 billion in fiscal year 2010.
For commercial mortgage brokers
and their clients, there are plenty of
reasons to like FHA lending programs.
Because FHA loans are backed by the
federal government, their interest rates
are highly competitive. They also are
nonrecourse, which means that in the
case of a default, the lender only can
pursue the collateral put up to get the
loan; the government must make up
the difference. HUD’s programs also
allow for fixed, long-term financing, as
much as 40 years for new construction
and 35 years for refinancing.
But applying for a HUD loan is a completely different animal than working
with a conventional or private lender,
and the process can rattle even the
most seasoned owner or developer.
That is where the knowledge and experience of a commercial mortgage broker
can come into play.
HUD has maintained a stellar record on its multifamily and health-care
loans because of the intense scrutiny
they give to each and every loan application. It is critical to submit nearly
flawless loan packages. Incomplete
applications or careless mistakes can
lead to costly processing delays and
might even scuttle a transaction.
Here are five points that can help
HUD newcomers navigate the rigorous under writing process and ensure a
only conclusion it can draw is that poor
management is to blame. In addition,
a property that is not performing at its
potential can and will receive increased
scrutiny from the lender and from HUD.
Correcting any issues and restoring occupancy levels to market norms, therefore, is far more important than rushing
It also is important to maintain
stable operations throughout the ap-
plication process, because HUD’s Mul-
tifamily Accelerated Processing (MAP)
and LEAN offices will revisit property
performance during the processing
required mortgage-credit investigation
and related paper work.
set aside enough time to respond to information requests.
3. provide full disclosure
There is no such thing as too much information when it comes to compiling a bulletproof application. Lenders can’t help
you and your client address and overcome a problem if they don’t know about
it. HUD’s processes are so thorough that
you can be sure everything that needs to
be known will be at some point.
It is far better to communicate issues
like low credit scores, defaults, title challenges, pending judgments or suits, and
“HUD has maintained a stellar record
on its multifamily and health-care
loans because of the intense scrutiny
they give to each and every loan
application. It is critical to submit
nearly flawless loan packages.”
review of the lender’s underwriting.
Commercial mortgage brokers should
advise property owners or operators
not to make any sudden changes to
the development after the application is filed. If operating changes are
inevitable, it is crucial to communicate
those changes to the lender as soon
as they are known, so they can work
with you and your client to present a
plan for mitigating them before HUD
offers its own recommendations.
environmental concerns to the lender
than to try to hide them. When they inevitably surface in the submission process, it can hurt the deal.
5. Find partners
Given the recent flurry of interest in HUD
loans, it’s not only borrowers who are
new to the agency’s application process.
Lured by the increase in loan commitments, plenty of lenders have jumped
on board with HUD in recent months,
and few of them have extensive experience with its loan programs. A lender
that is a jack of all trades may be good
at providing lending options, but closing deals is what counts. Knowing what
to expect from HUD to ensure borrowers are prepared in advance is critical
for a smooth transaction, as is working
with the right partners along the way. It
is much better to find a third party that
specializes in HUD loans than one that
doesn’t but may be cheaper.
The results can be tough to swallow
when your partner tries to cut corners
or isn’t prepared for the rigor which HUD
brings to its processes. For instance, an
engineering company might exaggerate
estimates for the useful life of a building
to lower a borrower’s reserve requirements, only to see the borrower blanch
when HUD’s review increases those reserves based on its own analysis. Or a
borrower risks having a property’s valuations reduced after submission when
an appraisal company isn’t aware of ineligible sources of other income.
HUD is familiar with the work of the
most reputable companies, and when
you partner with one of them, it tends to
reduce questions that might otherwise
arise. The more thorough your lender and
involved third parties are, the quicker
HUD will issue a firm commitment that is
consistent with the original application.
1. Stabilize performance
Your clients should recognize the
importance of achieving stable operations before submitting loan applications. The value used for lending
is primarily based on how much net
operating income the project is pulling in relative to its market capitalization rate — what the industry calls the
“income approach.” Submitting an application while the project has not yet
reached its operating potential in terms
of achieving market rents or stabilizing
expenses will result in a lower market
value and reduced loan proceeds.
For example, consider a recently
purchased multifamily property that
is operating at 87 percent occupancy.
When HUD sees that the local market
is achieving 97 percent occupancy, the
2. Define the principals
Identifying the mortgagor, management agent and operator (if any) at
engagement is vital for expediting the
underwriting and processing of any
transaction. The lender’s processing
team cannot produce the required paperwork without the proper articles
of organization and operating agreement (in the case of a limited liability
company), making it an important early
step to get right.
Turning in paper work without confirming the entity structure can result in needless duplication and delays. Although it
is reasonable that these parties may not
be firm in pre-application — for instance,
on a new construction deal — the sooner
this information is provided, the sooner
the underwriting team can begin the
4. Set goals and communicate
The lender’s team should establish a
timetable for borrowers that illustrates
how the deal likely will progress provided that the borrower, underwriting
team and all third parties are responsive throughout. Because of the number of parties involved, a slow response
to the lender’s information request can
result in delays in various parts of the
application — from the appraisal and
environmental study to the overall application assembly.
Failure to promptly respond to HUD
information requests almost always
results in a delay in the application
submission as the agency effectively
“stops the clock” on application processing until they are addressed. In
some cases, HUD may even return an
application to the lender if they are unable to produce the required information because of a lack of response from
the borrower or its principals.
People have busy lives and your
lender team should understand this.
Communicate available times that work
for you to manage routine updates and
• • •
Inexperienced or ill-informed market
participants have made the HUD pro-
cess seem unnecessarily complicated.
It doesn’t have to be. Every transaction
has twists and turns, and not every con-
tingency is known going in. But when the
right team is in place, these hiccups are
just part of the process and can be man-
aged easily. Knowing what to expect is
half the battle; the rest is up to us. •
Adrian Hartman is a director of originations in
Love Funding’s St. Louis office. In his previous
position as vice president and senior underwriter, he closed more than 30 multifamily and
health-care transactions with loan proceeds
exceeding $200 million. Hartman has served
on numerous loan committees, acted as mentor
to under writers and assisted in expanding the
depth of the under writing team. Reach him at
email@example.com or (314) 512-8736.