How is an FHA-Insured Mortgage Loan priced? How is the interest rate determined?

FHA-Insured loans are fixed rate, self-amortizing obligations. The loans are most often made with the backing of a GNMA security, which guarantees timely payment of principal and interest to the investor with a pledge of the full faith and credit of the US Government. Altogether the spread for a taxable mortgage loan will be an amount over the 10-year Treasury security that includes the investor’s spread and, guarantee and servicing fees.  The actual mortgage constant will also include an amount paid to HUD for a mortgage insurance premium (an “MIP”). (For tax – exempt transactions the GNMA security is held by the Bond Trustee and is used to provide a AAA rating for the bonds.) The actual, fixed interest rate for a transaction is determined when the rate is locked with the investor.  This usually occurs following the issuance of a Firm Commitment for Mortgage Insurance by HUD for the project.

What will a typical FHA-Insured Mortgage Loan transaction cost?

FHA transaction costs are generally broken down into categories corresponding to the various stages of processing and, the various programs. Typically, a Borrower will pay for: third party reports, such as a market study, an appraisal, a PCNA report, and an Environmental Phase I (and Phase II, if required); HUD Application and Inspection Fees; GNMA Fees; the Mortgage Insurance Premium; HHF’s financing fees; and legal fees. The Borrower will also have to post deposits at closing, such as: Tax/Insurance/MIP (and Operating Deficit, if required) escrows.

What are the recourse provisions of an FHA-Insured Mortgage Loan?

FHA Mortgage loans are non-recourse to the Borrower, with the exception (i) for funds or property of the project coming into the hands of the Borrower which, by provisions of the HUD Regulatory Agreement the Borrower is not entitled to retain; or, (ii)  for their own acts and deeds of others which the Borrower has authorized in violation of the provisions of the HUD Regulatory Agreement.

Are there any particular ownership requirements for an FHA-Insured Mortgage Loan?

The owners of the property must have successful experience, adequate liquidity and net worth, and the Borrower must (generally) be structured as a “single asset, single purpose entity”, which is generally defined as: an entity which does not engage in any business other than owning or operating the collateralized property, or which does not acquire or own material assets other than the collateralized property and incidental personal property, and which (a) maintains its assets in a way which segregates and identifies such assets separate and apart from the assets if any other person or entity, (b) holds itself out to the public as a separate legal entity from any other person or entity, (c) conducts business solely in its name and (d) does not (and shall not) have ay other indebtedness other than the particular loan (or pre-approved secondary loans) and indebtedness for trade payables incurred in the ordinary course of business. HUD (through the 2530 Clearance process) must approve prospective owners.

Can Mezzanine or Secondary Financing be utilized together with an FHA –insured Mortgage Loan?

Approved subordinate debt is allowed under most programs in limited amounts. Terms and conditions of such financing are dependent upon the program, and upon its source (public or private). Under the 223 (f) Acquisition/Refinancing Program, the sum of approved private, secondary financing plus FHA insured first mortgage loan may not exceed 92.5% of the project’s fair market value.

Can an FHA-Insured Mortgage Loan be assumed?

FHA-insured mortgage loans are assumable with the consent of both HUD and the mortgagee. A fee may be charged to cover applicable costs.

Can an FHA-Insured Mortgage Loan be prepaid?

FHA-insured mortgage loans are pre-payable based upon terms that are negotiated to meet the needs of the Borrower.  Typical FHA-insured loans have a specified lockout period, and then pre-payment schedule with a declining penalty (i.e.: a two (2) year lock out; followed by a 8% penalty in the 3rd year, and then declining by 1% per year until par following year 10).