Owners of LIHTC properties, project based Section 8 properties and other affordable housing have the best terms available in the FHA multifamily programs. The qualification test is more specific than most people expect.
The three tiers
| Tier | Max LTV | DSCR | Vacancy |
|---|---|---|---|
| Market rate, or LIHTC without rent advantage | 87% | 1.15x | 7% |
| Affordable with rent advantage to market | 90% | 1.11x | 5% |
| 90% or more units with rental assistance | 90% | 1.11x | 3% |
Tax credits alone are not enough
A LIHTC property qualifies for the affordable tier only if its restricted rents carry an advantage relative to achievable market rents. The logic is sound: a property whose restricted rents sit well below market has a cushion, because those rents stay collectible if the market softens.
A LIHTC property in a soft submarket where restricted rents are at or above achievable market rents has no such cushion, and is underwritten as market rate at 87% and 1.15x. The appraisal establishes this, so the tier may not be settled until the appraisal is complete.
The rental assistance tier and the 3% vacancy floor
The top tier needs 90% or more of units covered by rental assistance, which in practice means a project based contract rather than tenant held vouchers. The reward is the 3% underwriting vacancy, which is quietly the most valuable line in the table. Underwriting at 3% rather than 7% raises underwritten income by roughly four percent of gross potential rent, and that flows straight into the coverage test.
What else applies to a tax credit deal
- Subsidy layering review where multiple public subsidies combine.
- Developer fee treatment, including deferred fee, which has to be structured around HUD's surplus cash rules.
- Secondary debt structuring for soft loans and public sources.
- HAP contract renewal analysis on Section 8 properties.
- Income averaging, which changes the restricted rent mix and therefore the rent advantage analysis.
Year 15 and beyond
Properties coming out of the initial compliance period are often prime candidates. A 35 year fully amortising fixed rate loan suits an asset the sponsor intends to hold for the long term, and the affordable tier terms are the best in the program.
Send us the rent roll, the LURA and the current debt and we will tell you which tier the property lands in and what that is worth.
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.
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We will tell you which program fits and what the guidance actually requires including when the answer is that FHA is the wrong tool.