There are many variables to consider when choosing the right commercial lending program for your project. It is advisable to first focus on the interest rate, loan-to value, recourse vs. non-recourse, loan terms and pre-payment penalties. Once you have gathered information about those loan components, choosing the correct loan program for your project will be much easier. Read on for more information about each loan feature.
HUD/FHA 223(f) provides the lowest long term fixed interest rate in the marketplace. For long term holders, that are seeking a loan amount in excess of $3,000,000, there is no better loan available. Fannie Mae and Freddie Mac loan programs have interest rates that are approximately a half percent or higher that are very beneficial for multifamily investors. A majority of these loans have balloon payments after a 5,7,10, or 15-year fixed rate term. If you plan on keeping this property long term, interest rate risk needs to be evaluated and considered when refinancing at the time the balloon payment is due at the loans maturity. Many local banks offer short term fixed, or variable rates. The interest rates are not as favorable HUD/FHA, Fannie Mae or Freddie Mac Loan programs.
Recourse Loan vs Non-Recourse Loan
Is the loan recourse or non-recourse? A recourse loan is when the principals of the loan are held personably liable in the event of the loan default. The lender can recoup their losses by pursuing the collection of the principal’s assets. Recourse loans require less stringent underwriting, and can be executed more quickly that non-recourse loans. Recourse multifamily apartment loans include Commercial Banks, Hard Money Lenders, and Bridge Financing. Non-recourse loans are secured by the property. If the borrower defaults on a non-recourse loan, the lender does not have any right to pursue the assets of the principal. There are certain exceptions which include fraud, criminal activity, or negligence. Underwriting and required property reports are more extensive, as the lender is taking the entire risk in the event of a default, and wants to ensure that the property condition and cash flow can support the re-payment of the loan.
Short Term Loans vs Long Term Loans
Investors have many different goals when purchasing or constructing multifamily housing. There are those that are looking for short term holds of five years or less. Their main focus is purchasing a property at a great price that needs many capital repairs, and those that are mis-managed and occupancy levels are below the norm. They invest money in needed repairs, change management to run the project more efficiently and increase occupancy prior to selling the project at a profit. On the other hand, there are long term owners that look to keep the project long term, and focus on a long term fixed interest rate with a 35-year term, in order for them to have a mortgage payment that has no balloon payment or carries any future interest rate risk. Visit the LSG Lending Advisors HUD/FHA 223(f) loan page for more information.
Assessing the Prepayment Penalty
Many lending programs carry significant prepayment penalties that can discourage borrowers from attempting to lower their interest rates by refinancing. Fannie Mae and Freddie Mac have yield maintenance pre-payment penalty structures. Yield Maintenance is a prepayment penalty that, in the event the borrower pays off a loan before maturity, allows the lender to attain the same yield as if the borrower had made all scheduled mortgage payments until maturity. Yield maintenance premiums are designed to make lenders indifferent to an early prepayment by a borrower. Yield Maintenance allows the bond investors to maintain the same yield as if the borrower made all scheduled mortgage payments until maturity. If your existing loan is close to maturity, absorbing a pre-payment penalty with a reduced rate can still provide a project with debt service savings through a HUD/FHA 223(f) refinance.
LSG Lending Advisors is available to answer any questions you have about choosing the right loan for your project. Contact us today!