MORTGAGE INSURANCE PREMIUM
Mortgage insurance premium is payable at closing for each year of construction and then monthly thereafter. The mortgage insurance premium is 0.65% per year for market rate properties, 0.35% for “affordable properties” and 0.25% for “broadly affordable” properties or any property type that is green. Virtually all newly constructed properties will qualify as “green.”
TERM & AMORTIZATION
Fixed and interest only for up to 36 months during construction, followed by an additional 40 years of fully amortizing, fixed-rate payments.
INTEREST RATE
Interest rates are fixed throughout the life of the loan (both construction and permanent stages) and determined at HUD loan commitment by prevailing market conditions. Plus there is an annual mortgage insurance premium that, for newly constructed properties, is generally only 0.25%.
Generally, the rate is locked following issuance by HUD of its commitment to insure the loan and deposit by the borrower of a 0.5% good faith deposit that is refunded at closing.
RECOURSE
All loans are non-recourse during both construction and permanent financing.
ASSUMABILITY
All loans are fully assumable subject to FHA approval and a trivial fee of 0.05% of the original FHA-insured loan amount.
PREPAYMENT
Generally, for best pricing, 10 years of call protection with a two-year lockout, followed by a step down from 8% (so, for example, a prepayment penalty equal to 6% of the balance outstanding as of the date of prepayment for loans prepaid in the fourth loan year). There is no prepayment penalty if the loan is assumed.
APPLICATION
Market rate property applications follow a two-step process: first the pre-application, then the firm application. Affordable and rental assistance properties may use one-step processing, thus shortening the time between application and HUD commitment.
SYNOPSIS OF COSTS
Third-party costs: – to cover lender due diligence and third-party reports, including:
- Appraisal
- Market study
- Phase 1 environmental, including radon
- Utility consumption analysis (to qualify for green MIP)
- Zoning report
- Construction cost review
- Plans and specs review
FHA exam fee: 0.30% of the loan amount, paid 0.15% at pre-application and 0.15% at firm application. However, for projects in Opportunity Zones, the exam fee is only 0.2% (0.1% for broadly affordable projects in OZs). See here for whether your property is in an OZ:
https://www.novoco.com/resource-centers/opportunity-zone-resource-center/guidance/novogradac-opportunity-zones-mapping-tool
FHA inspection fee: 0.50% paid from mortgage proceeds
Financing and placement fees: capped at a total of 3.50% of the loan amount, paid at closing from mortgage proceeds, but with our lender partners, generally a total of only 1% (assuming a loan of at least $10M).
Good-faith deposit (rate lock and commitment): 0.50% of loan amount deposited at the time of commitment and refunded at closing.
Borrower’s and Lender's legal, title, survey and other standard borrower closing costs.
TIMING
One-stage applications for affordable and rental assistance properties generally take 6 - 8 months to close, whereas two-stage applications for market rate properties generally close in 10 - 12 months, subject to deal specifics.
ADDITIONAL HUD REQUIREMENTS AND ITEMS FOR CONSIDERATION
An initial operating deficit account may be required to cover operating shortfalls incurred prior to stabilization. Usually, the amount will be equal to the greater of an appraiser's or underwriter's estimate, or four months of debt service for garden apartments, or six months of debt service for elevator buildings.
A working capital deposit in the form of cash or a letter of credit is required by HUD on all new construction projects in the amount of 4% of the loan amount.
Unused working capital and initial operating deficit escrows are released at the later of 12 months from completion of construction or six months of break-even occupancy.
Stabilization must be projected to be achieved within 18 months of the final certificate of occupancy.
The borrower must retain a qualified arms-length supervisory architect during the construction.
A cost certification for the general contractor and owner are required upon construction completion.
The general contractor must execute a guaranteed maximum price contract, provide a 100% performance and payment bond, and have a net worth equal to at least 5% of the project construction contract plus all uncompleted construction work on other projects.
Maximum underwritten occupancy of 93% for market rate properties, 95% for rent-restricted properties and 97% for subsidized properties.
