The Department of Housing and Urban Development offers developers an array of development financing yet the agency has never had the popularity of, say, Fannie Mae or Freddie Mac. There is a reason for that: the process of getting the loan can take up to a year and HUD does not like developers touching the site in question until the documents are signed.
But now may be a good time to revisit your notions about HUD, says Brandon Eustace, managing director at Hudson Realty Capital. A HUD loan usually means less equity out of the developer’s pocket, he tells GlobeSt.com. A local lender or bank that will provide construction debt will do so at the 65% to 70% LTC range. “HUD will get you to 85%,” he says. Another positive: You only have to lock in the interest rate once. “The HUD loan will convert into a permanent loan at the same interest rate on a 40-year term amortization.”
A HUD loan can also see you through construction delays and supply chain problems as it builds in reserves for working capital and initial operating deficit at 5%. “If there are delays they are built into the mortgage already,” Eustace says.
HUD also offers borrowers an interest rate reduction program, allowing them to modify interest rates if they drop after the loan has been set, he notes.
Finally, any construction project built to energy efficient standards receives a lower mortgage insurance premium “and that can be decent savings for a large loan amount,” he says.
But That Timeline
Eustace isn’t just preaching to the choir. He reports that there has been an increase in interest and activity in HUD loans as borrowing costs soar.
For many, though, HUD’s timeline is the deal killer. At ten to 12 months, it is a much longer process for which many people don’t have the patience or the time. The lengthy process can be particularly knuckle-whitening in an era of rising rates when the rate hasn’t been locked in, whereas a local lender can lock in within two to three months, Eustace says.
The application process is tedious too, he reports, with two major applications to submit. Once HUD gives a firm commitment to the loan the borrower is usually eight to nine months into the process.
HUD is also picky about development experience, Eustace says: it wants to work with developers that have a track record with HUD. If they don’t, then its essential to put together a team that does have HUD experience.
HUD is also adamant that the project be in a very strong market. “The market will be heavily scrutinized,” Eustace says.
These are all significant drawbacks, he admits. But Eustace and his clients keep coming back to one fundamental fact about HUD. “Even though there are more hurdles and a longer timeline, a HUD loan is a better financial deal for a developer.”