Market Rate vs. Affordable Properties in Relation to HUD 223f Loans
Market Rate vs. Affordable Properties and HUD 223(f) Financing
When purchasing or refinancing a building with a HUD 223(f) loan, investors and developers often need to decide whether to set rents low enough to have the property legally qualify as affordable housing, or to set rents at the going market rate. While market rate units typically provide more rental income upfront, deciding to make an affordable housing development can have a variety of benefits for developers and investors.
Borrowers Can Get Better HUD 223(f) loan terms FOR Affordable HOUSING
Borrowers with market rate properties are permitted a maximum 85% LTV (loan-to-value) ratio under the HUD 223(f) loan program. In comparison, borrowers can qualify loan with an LTV of up to 87% if their property is considered affordable housing. However, Rental Assistance Demonstration (RAD) properties, in which the owner signs a project-based Section 8 contract to limit rents and receive government reimbursement, can qualify for an even higher 90% LTV. Rental assistance and affordable properties also have lower minimum DSCR requirements (1.11x and 1.15x respectively) in comparison to market rate properties, which have a 1.18x minimum DSCR requirement.
How Investors Can Determine Affordable Rent Rates
The amount of rent per month that constitutes affordable housing can vary significantly based on location. In addition, it is typically based on a percentage of HUD's Area Median Income (AMI) calculation for a specific geographic location. To determine area median income for any specific area in the U.S., you can visit the HUD income limits guide.