For owners of multifamily housing, skilled nursing facilities, assisted living, and hospitals, the U.S. Department of Housing and Urban Development (HUD) provides some of the best financing terms available. Loans insured by HUD are long term, non-recourse, fixed rate, fully amortizing and assumable. Interest rates for HUD-insured loans are often the lowest fixed rate option available. However, timing is a critical consideration for borrowers planning their permanent financing strategies. A HUD-insured loan may not be feasible due to a tight closing deadline, or a property may not be eligible for a HUD-insured loan now, but it will be soon. Bridge loans are one option available to finance these assets quickly in the short-term.

How Bridge Loans Can Help

Bridge loans bridge the short-term gap between the funds a borrower needs now and the future permanent financing plan. Bridge lenders have the flexibility to design loan terms to match each borrower’s situation.

When considering bridge loan options, the first things that come to mind are total loan proceeds, interest rate, fees, loan term, prepayment lockout, and recourse. These are often negotiable, with each factor bearing on the others. A short prepayment lockout may necessitate higher fees, or lower recourse may be tied to a lower LTV. However, other qualitative factors are just as important, especially when planning to refinance into a program as complex as HUD. How well does the bridge lender understand your asset type? How long is your bridge lender quoting you to close, and have they met this timeframe before? Does your bridge lender truly understand the HUD exit, or are they creating a bridge loan that will not be eligible for a HUD refinance? Certainty of execution is just as important as the economics of a bridge loan.

Background on HUD Financing

HUD provides mortgage loan insurance to specially approved lenders who have undergone extensive review to participate in HUD’s programs. Lenders who can arrange loans for affordable housing, market rate multifamily and hospitals through HUD are known as MAP lenders, which stands for Multifamily Accelerated Processing. Lenders who can arrange skilled nursing and assisted living loans through HUD are known as Lean lenders. The term Lean refers to lean production methods introduced into the HUD loan review process in 2008. Lenders can be approved to arrange loans under one or both of the programs.

Whether MAP or Lean, HUD-insured loans share the same features: long term, non-recourse, fixed rate, fully amortizing and assumable. Because they are long term, fixed rate and fully amortizing, borrowers do not need to worry about interest rate adjustments or incurring new transaction fees every few years to refinance the same property. The fact that HUD-insured loans are assumable means that borrowers who do not plan to hold the property for decades can still benefit from HUD-insured financing. In a rising interest rate environment, selling a property HUD-insured financing in place can add value. And non-recourse financing is always a strong selling point for any borrower. HUD loan terms can be as long as construction + 40 years for new construction and substantial rehabilitation projects, or 35 years for an acquisition or a refinance. Low interest rates and long amortization periods result in more net income to borrowers.

In exchange for providing non-recourse financing to borrowers and insuring lenders against a loss, HUD collects a mortgage insurance premium (MIP) to cover losses incurred each year. MIP payments are collected by MAP and Lean lenders in addition to principal and interest payments.

The Gaps to HUD Financing

Timing is a critical consideration for borrowers planning their permanent financing strategies. In an acquisition context, a HUD-insured loan may not be feasible due to a tight closing deadline. For many reasons, HUD programs take more time to get to the closing table. Because HUD is providing 35- to 40-year non-recourse loans, the underwriting that HUD requires its lenders to perform is more extensive than most borrowers have experienced. After the lender review process is complete, HUD performs its own review underwriting. The nine- to twelve-month timeframe to get through the process simply will not work for most acquisitions. A bridge lender can meet an acquisition deadline quickly, allowing the borrower to refinance into HUD with less closing pressure.

Some debt will not be eligible for a HUD refinance for a certain amount of time. For example, HUD will not allow a skilled nursing or assisted living facility that had a cash-out refinance above 70% LTV to refinance into a HUD-insured loan without the existing debt seasoning for at least two years. The bridge lender providing that cash-out refinance will therefore need to provide a loan term long enough to season for two years and get through the underwriting process. However, if the cash-out refinance was kept under 70% LTV, HUD may allow the skilled nursing or assisted living facility to refinance into a HUD-insured loan immediately. In this case, the bridge lender can provide a shorter loan term.

In the new construction or turnaround-to-stabilization contexts, a property will not be immediately eligible for a HUD-insured loan because HUD’s refinance programs are for stabilized assets. Therefore, a borrower who is in the process of turning around a property cannot obtain a HUD-insured loan until the property can clearly demonstrate the ability to cover the HUD-insured debt service. A bridge lender can take on the lease-up risk that HUD will not accept, giving it time to stabilize before it refinances into HUD.

Talk to a Bridge Lender

HUD is one of the best permanent financing solutions available for multifamily and healthcare real estate. The nuances of the program are so complex, that it is important to plot out every step of your transaction from the very beginning to your HUD closing. The next time you are considering your borrowing needs, reach out to a bridge lender first. A bridge loan is likely to be the first milestone on your way to permanent financing, and a good bridge lender can help you plan for your short-term and long-term financing needs.