HUD Frequently Asked Questions (FAQ)
Question:
How is a HUD loan priced? How is the interest rate determined?
Answer:
HUD loans have a fixed interest rate and are fully amortizing. HUD loans are almost always made with the backing of a GNMA security, which guarantees timely payment of principal and interest to the investor through a pledge of the full faith and credit of the U.S. Government. Altogether the interest rate for a taxable HUD loan will be an amount over the 10 year Treasury that includes the investor's spread, guarantee, and servicing fees. The actual mortgage payment will also include an amount paid to HUD for the Mortgage Insurance Premium (MIP).
Question:
What will a typical HUD loan cost?
Answer:
HUD loan costs are generally separated into categories corresponding to the various stages of processing and are dependent on 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; the MIP; HHC Finance's financing fees; and legal fees. The borrower will also have to post deposits at closing for Tax, Insurance, and MIP escrows.
Question:
What are the recourse provisions of a HUD loan?
Answer:
HUD loans are non-recourse to the Borrower with the exception (i) for funds or property coming into the hands of the Borrower which, by provision 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 provision of the HUD Regulatory Agreement.
Question:
Are there any particular ownership requirements for a HUD loan?
Answer:
The owner(s) 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 and which (a) maintains its assets in a way which segregates and identifies such assets separately and apart from the assets of 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 any other indebtedness other than the particular loan (or preapproved secondary loans) and indebtedness for trade payables incurred in the ordinary course of business. HUD (through the 2530 Clearance process) must approve prospective owners.
Question:
Can mezzanine or secondary financing be utilized together with a HUD loan?
Answer:
Approved subordinate debt is allowed with most of the HUD programs but in limited amounts. Terms and conditions of such financing are dependent upon the HUD program, and upon the debt's source (public or private). Under the 223 (f) Acquisition/Refinancing Program, the sum of the approved private, secondary financing plus the HUD first mortgage loan may not exceed 92.5% of the project's fair market value.
Question:
Can a HUD loan be assumed?
Answer:
HUD loans are assumable with the consent of both HUD and the mortgagee. A fee may be charged to cover applicable costs.
Question:
Can a HUD loan be prepaid?
Answer:
Typically HUD loans are prohibited from prepayment for the 1st year, then have a 9% penalty declining 1% each year thereafter until 0%. Alternative lockout and prepayment structures are available.