There is no other lender in the apartment market offering a 35 year, fully amortising, fixed rate, non recourse, assumable loan. That combination is the reason FHA financing exists and the reason owners put up with the process.
Thirty five years, fully amortising
The loan pays itself off. There is no balloon, which means there is no refinance risk, which means you never have to go back to the market at a moment you did not choose. Term is capped at 75% of the property's remaining economic life, so on an older asset the practical maximum can be shorter.
Fixed for the full term
Not fixed for five or ten years and then reset. Fixed at rate lock for the life of the loan.
Non recourse
The lender's remedy on default is the property. Key principals sign standard carve outs covering fraud, misrepresentation, misapplication of funds and similar acts, but these are not performance guarantees. A property that underperforms because the market turned does not trigger them.
Against bank debt, which on many assets still carries full or partial recourse and quarterly covenant testing, this is the difference between an asset level risk and a balance sheet risk.
Assumable
A buyer can take the loan with HUD and lender approval on payment of 0.05% to HUD. If your coupon is below market when you sell, that debt is an asset that travels with the property and shows up in your price. No rate comparison at origination captures this, because the benefit lands at exit.
What you accept in exchange
- Prepayment protection, typically ten years, commonly starting at 10% and declining a point a year. After it expires the loan is openly prepayable with no yield maintenance and no defeasance.
- A Regulatory Agreement governing operations, distributions and transfers.
- Escrows and reporting: taxes, insurance, mortgage insurance, replacement reserves of at least $250 per unit per year, audited annual financials, and a Capital Needs Assessment refresh every ten years.
- A single asset borrower entity.
- A longer closing process than agency or bank debt.
Who this suits
Owners holding for the long term. If you intend to still own the asset in twenty years, eliminating interest rate and refinance risk permanently is worth the regulatory overhead, and the reserve discipline is arguably a benefit.
If the plan is to stabilise and sell within five years, the prepayment structure works against you and a shorter execution probably fits better. That is a legitimate answer and we will give it to you.
Tell us your hold period and we will tell you honestly whether this structure is the right one.
Primary sources for this article
HUD revises mortgagee letters and handbooks frequently; where a provision is a draft rather than operative guidance we say so on the page. This is general information, not legal, tax or financial advice, and not a commitment to lend.
Have a property this bears on?
We will tell you which program fits and what the guidance actually requires including when the answer is that FHA is the wrong tool.