Thankfully, finding a new construction loan has become much easier over the last few years since banks and lenders have become more aggressive and competitive on lending standards. Although, knowing what loan program is best for your project can still be a challenge. In this blog, we will compare the benefits and drawbacks of the following new construction loan programs that are available for multifamily apartment projects:
- Banks and Credit Unions
- Life Insurance Companies
- Fannie Mae
- Hard Money Lenders
- HUD/FHA 221(d)(4)
One of the most significant differences between these programs is that Fannie Mae, Freddie Mac, and the HUD FHA 221(d)(4) are non-recourse in the event of a default, as long as there is no fraud or intentional falsification of records. On the other hand, a majority of Banks, Credit Unions, and Life Insurance Companies require personal guarantees (recourse) in the event of a default under any circumstance. There may be some Life Insurance Companies that offer non-recourse as well.
Banks and Credit Unions usually lend between 70% to 75% Loan-to-Cost (LTC) with a minimum Debt Service Coverage Ratio of 1.25% (DSCR). Loan terms can range from 18 to 36 months, and can often times be rolled over to a non-recourse Fannie Mae or Freddie Mac permanent loan. After 36 months the loan could also qualify for HUD/FHA 223(f) financing for long term holders. The net worth requirement is generally equal to the loan size or, 1.5 times the loan size. Excellent credit is required, and interest rates are based on the prime rate (currently at 5.5%), plus 1 to 2%.
Life Insurance Companies lend between 60% and 70% Loan-to-Cost (LTC) with a minimum Debt Service Coverage Ratio of 1.20% (DSCR). Loan terms are up to 36 months, and roll over to a long-term permanent loan with a fixed rate for 10 to 25 years. The net worth requirement is 1.5 to 2.5 times the requested loan amount. Excellent credit is required, and interest is based on the 1-month Libor rate (currently at 2.49%), plus 2.75% to 3.5%.
Fannie Mae Market Rate Forwards Program
Fannie Mae offers Market Rate Forwards program for new construction that lends up to 90% Loan-to-Value (LTV) with a minimum Debt Service Coverage Ratio of 1.15% (DSCR). The interest rate is locked in advance for 24 to 30 months in advance of construction completion, and can be converted into a permanent loan up to 30 years, with a 35-year amortization. The loan is non-recourse, with standard carve out provisions. The net worth requirement is generally equal to the loan amount, and liquidity needs to be 10% of the loan amount. Excellent credit is required for this program. Fannie Mae interest rates are currently between 4.375% and 5.5%, and have several adjustments that determine the exact rate based on loan term, location, and affordable components.
HUD/FHA 221(d)(4) Program
The HUD/FHA 221(d)(4) program lends between 85% to 90% Loan-to-Cost (LTC) with a minimum Debt Service Coverage Ratio of 1.11% to 1.176% (DSCR). Loan terms are up to 24 months interest only, that converts to a 40-year permanent fixed rate that is fully amortized. The net worth requirement is generally 20% of the requested loan amount, and liquidity of 7.5% of the requested loan amount. Above average credit is required, and interest rates are based on the U.S. 10 Year Treasury (currently at 2.42%). The interest rates are based on the requested loan amounts. The current rates are approximately 4.25% to 4.75%. A misconception is that this program is only for affordable, subsidized Section 8 or properties with a HAP contract. Multifamily apartments that charge market rates with no affordability component qualify for this program. Below is a summary of the benefits that are listed below:
- 90 to 100% leverage for non-profit sponsors (when utilizing LIHTC/Grants)
- Up to 90% leverage for affordable projects
- Market rate or affordable projects
- Permanent rate lock at initial closing
- Flexible prepay
- Up to 24-month interest only loan converted to 40-year fixed rate (one loan)
- Eliminates interest rate risk by not having to convert construction loan to a separate permanent loan, and removes future interest increases during 40-year permanent fully amortizing loan term
Equity sources that can be combined with this program include:
- Historical Tax Credits
- Public grants
- Tax Abatements
- 4% & 9% Low Income Housing Tax Credits (LIHTC)
LSG Lending Advisors will be there every step of the way to help navigate and guide you through the process. We have the experience to size your transaction and provide you with a detailed proposal of terms and costs for you to make an informed decision.