The Many Benefits of a HUD Loan

When most people hear the word HUD loan, their minds may gravitate to a residential home loan. However, many don’t realize that businesses can take advantage of HUD loans for commercial real estate purposes. At Barrington Commercial Capital, we’re taking a deep dive into what a HUD loan entails and the many benefits it can provide for a business owner.

What is a HUD Loan?

Similar to other federal agencies like Fannie Mae and Freddie Mac, the U.S. Department of Housing and Development (HUD) is a federal agency that focuses on multifamily unit loans. HUD ensures 100% of the loan in case of default, which provides greater benefit and security for the borrower.

HUD not only insures loans for affordable housing developments but also ensures multifamily development projects. These construction loans are 221(d)(4) loans and provide some of the most competitive terms for a developer.

Unlike most bank loans, HUD loans are asset-based, which means they keep a close eye on project location, rent, expenses, and development to ensure the final result will be a success.

HUD loans are highly sought after because, once approved, you’ll be working with a sponsor with a proven track record that can ensure the rate of success for your project.

Some of the benefits include the following:

  • 40-year term amortization
  • Competitive fixed rates
  • Loan amounts up to 85% of the project
  • Non-recourse financing

The HUD Approval Process

For those looking for an extremely low-risk loan option, it might be worth investing in the HUD loan process. A few things to consider about the HUD loan approval process:

  • Interest Rates: Applicants likely won’t know their interest rate for a 40-year loan until 30 days prior to closing. A significant change in rates can mean a big difference in desired equity. However, most applicants are ok assuming this small risk due to HUD’s notoriously low rates, and once the rate is locked in, they will be set for 40 years.
  • Screening Process: The applicant will go through a pre-review process, and the project must be well established with a plan to execute. The loan process can take seven to 10 months, but it can take slightly longer to close the loan.
  • Prevailing Wage Requirement: This term refers to the amount a contractor must offer employees when doing business with a government agency. This wage is slightly higher than standard wage rates, so borrowers can expect to pay on average 2.5% to 10% more for labor under this type of loan.
  • Selection Process: HUD only loans to approved developers/sponsors and will not lend to those with a troubled HUD loan history. During the time of the project, the developer is required to partner with a bonded contractor and HUD-approved development, construction, and management teams.
  • Mortgage Insurance Premiums (MIP): A borrower on a HUD construction loan is required to pay a mortgage insurance premium. The premium is 0.65% and can go as low as 0.25% if the borrower has obtained a green MIP reduction by incorporating energy-efficient improvements into their project plan.

While this may seem like many hoops to jump through for a loan, the benefits are well worth the time. At Barrington Commercial Capital, we can help you obtain a HUD commercial real estate loan. We’ll advise you every step of the way to make sure it’s the best option for your specific project.

If you still have questions about what commercial real estate financing option would be best for your future goals, please contact us by submitting a form online, email us at info@bccfirm, or give us a call at 404-602-9100. To stay up to speed on all things Barrington Commercial Capital, follow us on Facebook, Twitter, and LinkedIn. And lastly, sign-up for our monthly email to stay informed of the latest commercial capital options available to you and your business.