HUD New Construction
Explanation New Construction-Map Loans
(401) 525-6544
The FHA/HUD new construction/substantial rehabilitation program is designed for apartments and health care facilities and is a conventional loan. FHA insures the mortgage and this results in favorable terms and low rates. Subsidy requirements, affordable Housing percentages, and low/middle income requirements for tenants do not apply. The program allows forupscale projects with pools, tennis courts, etc. as long as market rents and market expenses support the costs.
The terms are a fixed rate (no balloon) construction loan based on 90% of costs, and a 1:10 Debt Service Coverage Ratio (Utilizing 90% of NOI). When final construction numbers are accepted, the loan rolls into a 40 year fixed rate permanent at the same rate. Many transactions allow a credit for appreciated land value. This calculation uses value estimates from an appraiser for the intended use of the land as of the closing date. In turn, thismay allow loan sizes to climb to more than 100% of total project "costs". The construction mortgage and the permanent are both non-recourse and always assumable (not just "one time"). The forty-year amortization period starts when construction is completed and it becomes a permanent mortgage. The program also allows for a 10% Builder's Sponsor's Profit Risk Allowance (BSPRA) for apartments. This is similar to a developer fee that is based on all the hard and soft costs except the land.
The FHA Insurance Process:
Upon receipt of the signed agreement, we will send you a list of additional information needed for the pre-application review by credit committee. Depending on the HUD office, there may or may not be a pre-application meeting. We will package the additional information and send it for final credit committee approval. When the pre-application package is complete, it will be sent to the HUD office for review. Third party Feasibility and a Phase I Environmental Report are required at this stage. The project essentially gets a pass/fail during the pre-application review by FHA/HUD. The pre-application results in an invitation letter that will include rents and operating expenses that FHA will COMMIT to underwrite to. This is a commitment for the 1.1 DSC mortgage calculation of the underwriting. Transactions that receive an invitation letter generally close. We have always received a commitment after receiving the MAP invitation letter.
After the invitation letter is received, lenders and the borrower will put together a Firm Submission Package. Assuming that no new problems or concerns arise (see above), the loan should be committed within 30 to 60 days of FHA/HUD's receipt of the firm submission pack age and the exam fee. The commitment to insure the mortgage is good for thirty days (with one extension) and we can close within a few weeks provided the local HUD offices' schedule could accommodate us. Reasons for which a firm commitment might not be issued include an unqualified builder, or borrower who supplied erroneous information.
The firm submission is extensive and includes complete plans and specifications and qualifications and statements for the borrowing entity, general contractor, management agent, architect and others involved with the project.
New Construction FHA-Insured MAP Processing Costs
STAGE I: Pre-application
- Packaging Fee $12,500 (Refunded at Closing)
- Phase I Environmental estimated $2,000
- Feasibility Study & limited appraisal estimated $8,500
Stage I can take 1-2 months to complete the feasibility study and HUD may require 1-2 months to issue the invitation letter.
STAGE II: Firm Submission (This stage can be submitted at the same time as STAGE I)
- Processing Fee (paid)
- Appraisal estimated $5,000
- Engineering Review estimated $5,000
- Cost Review $5,000
- Exam Fee to HUD is 3/10th of 1% of mortgage (or $3.00/thousand)
Additional costs that you may incur include architects, legal expenses, other fees that may be charged by municipalities, sellers etc.
If STAGE II is done separately it can take HUD 1-2 months to issue the commitment
Borrower typically takes two to four months just to complete plans, specs and get final costs
STAGE III: Closing (a few weeks from receipt of the commitment)
1) Good Faith Deposit, locks the rate and is paid two to four weeks before the closing at 1 to ½ % of the mortgage amount. It is always refunded at closing
All costs are financeable if they are determined to be reasonable. (eg: Attorney's fees of $15,000 to handle the closing may be reasonable. Attorney's fees of $200,000 on $2M loan would not).
The total time line can take from 4 to 9 months depending on whether we decide to submit both the pre-application and the firm submission together in one step. For more detailed information, please review the 221(d)4 program at multifamily pro grams on the WEB at www.HUD.gov.
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Winthrop Financial Solutions, LLC
1240 Pawtucket Ave, Suite 301, Rumford, RI 02916
Howard L. Weldon
(Direct) 401-525-6544
(Fax) 888-679-0773
hweldon301@msn.com
