Sorting Through FHA/HUD Housing Finance –a revised (7/8/15) quick primer

venn 2015

As we sort out the FHA underwriting for 1 to 4 unit loans, I have been getting a lot of questions about what rules HUD or FHA has revised/ is revising to allow for loans on mixed use buildings.  This can be confusing, so I will do my best to lay out what is going on now, There are multiple HUD, FHA, VA, Fannie Mae and Freddie loan guaranty/loan insurance programs for residential buildings that have restrictions on how much non-residential space can be in a building when financing or refinancing mixed use.  I will work with our new appraiser guy Ryan in Boston on assembling a reliable matrix so we don’t keep conflating the requirements that are specific to each of these programs.  For people who are not actively engaged in trying to finance projects, this stuff probably blurs together under a broad HU or FHA banner, but the specifics really do matter.  Here is a brief summary:

Already Done: The Change in FHA Condo Finance
 John Norquist and others from the Congress for New Urbanism met with folks in the Treasury Department and explained how FHA and HUD underwriting rules were working against the policies on the books at HUD, EPA, and US DOT which actually promote mixed use buildings as part of walkable urbanism.  This turned into a shift in the FHA Condo Loan rules rather quickly. The Mortgagee Letter from FHA raised the baseline amount of allowed non-residential and provides a process of further increasing non-residential to up to 50% of building area in a condominium building.
This applies to the FHA insured loans that a developers takes out to build new buildings with condominium ownership or to convert existing buildings to condominium ownership.
This also has bearing on the FHA insured mortgages that individual condo owners get to buy or refinance their individual condo units in condo buildings with mixed use.  The building has to be on the FHA Approved Condo List for the individual condo buyer to get an FHA Insured mortgage on their unit.  FHA Condo list search page
Loan Programs that are already in place and can be used in Lean Context; Small Buildings/Incremental Projects.
  • VA 1 to 4 unit mortgage, 0% down 30 year with PMI.
  • Fannie Mae and Freddie Mac 1 to 4 unit mortgage term, PMI requirements, and down payment varies with credit score.
  • FHA 203(b)  1 to 4 unit mortgage, 3.5% down 30 year with PMI, if owner occupied for min. 12 months. ( 25% down if not owner occupied for 12 months).  FHA 203(b) 
  • FHA 203(k) 1 to 4 unit purchase + rehab mortgage, 3.5% down 30 year with PMI if owner occupied for min. 12 months. ( 25% down if not owner occupied for 12 months). FHA 203(k) Program  Some key information from the FHA Guidelines on how much non-residential floor area is allowed in a mixed use building under the 203(k) loan program:“A 203(k) mortgage may be originated on a “mixed use” residential property provided that the percentage floor area used for commercial purposes follows these standards:

    – One story building 25%

    – Two story building 49%

    – Three story building 33%

    The commercial use will not affect the health and safety of the occupants of the residential property.

    The rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.”

Loan Programs with new Underwriting Rules out for Public Comment – workable for apartment buildings and mixed use at the larger end of the spectrum of the Lean Building Types.
  • HUD 210  HUD 221(d)(4) and other HUD originated/FHA Insured Loan programs for 5 units or more

3 thoughts on “Sorting Through FHA/HUD Housing Finance –a revised (7/8/15) quick primer

  1. Martha Aills February 4, 2016 / 11:35 am

    Hi, John –
    I attended the 12/15 Kalamazoo Small Developer Bootcamp and learned a lot, revising my project to include your suggestions. BUT I have found no lending institution in Michigan that has an FHA loan for new construction of multi-family. Quicken loans will finance 2 units max (I’m proposing three). Mention of mixed use, commercial space, etc. also shuts down the conversation. Only resource seems to be a few institutions who offer way more expensive commercial loans. Am I missing something? Any suggestions for how to get a more reasonable financing terms?

    Thanks for your help.

    • rjohnanderson February 4, 2016 / 1:16 pm

      Martha, There is no FHA loan program for new construction of multifamily. The FHA 203(k) program covers acquisition, and renovation/construction for an existing building. Once the construction is complete the FHA 203(k) loan converts to a standard 30 year mortgage.

      For new construction I suggest talking with a local small bank about a construction loan that you will take out with a standard FHA 203(b) mortgage or the typical Fannie Mae and Freddie Mac 30 year loan products. If you have the 30 year mortgage approval in place the construction lender’s risk is reduced because they know you are going to pay off the construction loan with the 30 year mortgage. Read the underwriting standards for FHA, Fannie and Freddie and you will se that they all allow a limited amount of non-residential space as a percentage of the total building area. You will also see that they will lend on 1 to 4 residential units. The small local bank is the key to this. Find one that does construction lending. If they also originate FHA, Fannie or Freddie mortgages (and most of them do), they will be happy to lend on your house (which happens to have 3 units). Commercial loans are needed for 5 or more units. Get the underwriting guidelines from outfit insuring the mortgages and get to know the loan product from that starting point. Then you are not relying upon what the various bankers tell you. Please keep me updated on your progress. Also can I post this exchange on the Small Developer/Builder Facebook Page?

      • Martha Aills February 5, 2016 / 8:38 am

        Thanks, John. I did misunderstand, as I I thought that there was an FHA loan for new construction. Lots of lending institutions – including big ones – have said they’d be happy to finance my project if it were acquisition and rehab (203k) OR graciously offered to finance when my project was complete. So I’ll try again with your suggestions.

        And yes – you can post on the Facebook Page. But I’d rather you’d left my name off.

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