Federally-insured FHA/HUD financing has recently been one of the only viable options for many providers to build, renovate or refinance affordable and market rate multifamily properties. While traditional financing options are slowly returning to the markets, the increase in FHA demand has caused a drain on FHA resources and a backlog in applications.

To alleviate this backlog and to refocus FHA’s efforts on its mission to support the construction and preservation of safe, affordable housing, FHA is in the process of changing the underwriting criteria and process for several of its multifamily financing programs. It is expected that formal changes will be announced as early as late June.

Types of multifamily housing impacted include:

• Market-rate apartments
• Subsidized apartments with Section 8 contracts
• Senior living properties without a health care component (independent living)

Some of the key changes expected are that:

• Construction and renovation of subsidized housing will be incentivized, and these projects may be able to borrow more than they could in the past because of reduced debt service coverage ratio requirements. (Section 202 properties have already realized these benefits.)
• Non-subsidized affordable housing underwriting criteria will remain essentially unchanged.
• Market-rate multifamily projects will be scrutinized more and face higher thresholds.

These changes are targeted at managing the risk associated with market rate housing developments in today’s challenging economy, while promoting the use of FHA financing for more affordable and subsidized housing properties. They should ameliorate some of the demand on FHA resources and eventually speed up processing for projects as they move through the FHA pipeline.

These changes within the Office of Multifamily Housing follow other efforts to improve FHA program compatibility with other affordable and subsidized housing resources such as Low Income Housing Tax Credits. New FHA leadership has brought considerable experience with Low Income Housing Tax Credits as well as other Federal and Government Sponsored Entity (GSE) programs, which have historically meshed well with tax credits. FHA has also been working to streamline its health care lending platform by adding staff with health care underwriting and leadership experience to its Office of Healthcare Programs (formerly the Office of Insured Health Care Facilities).

Lancaster Pollard views these changes as positive moves to make FHA financing more accessible to those projects that most need it and to ensure the FHA portfolio remains strong and well-respected by investors, thereby keeping interest rates lower.

Once officially announced, specific underwriting changes can be found on Lancaster Pollard’s term sheets for each of the FHA multifamily financing and refinancing programs, located here. In the meantime, for more information on the FHA underwriting changes and their potential impact on your project, contact Lancaster Pollard at (866) 611-6555.