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Mapping Your Way Through Due Diligence Requirements For The FHA Loan Program

Bradley Fountain, MBA, article publuished in Multi-Housing News

For those seeking HUD financing under its Multifamily Accelerated Process (MAP) program, environmental and engineering due diligence requirements are substantially different from those required by Government-Sponsored Enterprises (GSE) such as Fannie Mae and Freddie Mac.

Despite the unstable lending market, the Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) program has been reliable in providing the most loans with the lowest rates in the market. Today, in both affordable and market rate housing, HUD remains sustainable and accountable, and has only made modest changes in underwriting as a hedge against a volatile market place. As of today, HUD is the affordable source for borrowers and developers and is as busy as ever.

For those seeking HUD financing under its Multifamily Accelerated Process (MAP) program, environmental and engineering due diligence requirements are substantially different from those required by Government-Sponsored Enterprises (GSE) such as Fannie Mae and Freddie Mac.

Delegated vs. Non-Delegated Underwriting

Fannie Mae utilizes what is called delegated underwriting, whereby the agency creating the underwriting guidelines delegates the responsibility to the lenders. The GSE lender in this case is the final authority for underwriting guidance. With HUD, the lenders provide underwriting tasks then submit the entire loan package to the regional HUD office for review. The third-party reports along with the entire loan package are then reviewed by HUD which acts as the final authority in the acceptance of the loan to be insured.

But what makes HUD due diligence unique, is that it has its own set of guidelines for the Property Capital Needs Assessment (PCNA) and the Phase I Environmental Site Assessment (ESA).

HUD Project Capital Needs Assessments

There are some distinctions that clearly define a FHA/HUD Physical Inspection Report (PIR – a part of the PCNA). Most notable are the glaring differences in the capital replacement reserve analysis requirements. Not only does a FHA/HUD loan typically require a 37-year loan term (as opposed to the standard 10+2 or 20-year loan term for Fannie Mae or Freddie Mac), but also a higher Initial Deposit and Annual Deposits for reserves with a “healthy” remaining balance. The additional years also mean that more realty items, such as windows, cabinetry, etc. that would not typically require replacement within the 12- or 20-year loan term scenarios, will need to be budgeted for replacement, adding to the overall capital reserves. Ultimately, these requirements can create a tricky situation for the lenders in their underwriting process.

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