The U.S. Department of Housing and Urban Development, more commonly known as HUD, has several specialized types of real estate loans it provides mortgage insurance for. One that can be especially useful to multifamily real estate investors is the Section 241(a) loan, which provides mortgage insurance for supplemental loans for multifamily projects. We'll take a look at what these loans do and don't do and how real estate investors can use them to improve their properties.
What is a 241(a) loan?
A 241(a) is a mortgage intended to finance repairs, additions, or improvement to multifamily rental housing, as well as healthcare facilities.
Technically speaking, Section 241(a) refers to the mortgage insurance HUD provides for these loans, not the loans themselves. HUD isn't actually loaning the money -- the program provides Federal Housing Administration (FHA) mortgage insurance for HUD-approved lenders. But the designation 241(a) is often used to refer to the loans; hence the term "241(a) loan." These 241(a) loans come with a fixed interest rate and generally must have the same term length as the property's primary mortgage.
The 241(a) loan program is not widely used. In the 2015 fiscal year (the most recent for which HUD shares data), HUD insured six (yes, only six) 241(a) loans, representing a total of 974 housing units. The total amount of money borrowed through the six insured loans was $25 million.
241(a) loans might be costly when compared with alternatives, which could explain the relatively light usage. Annual mortgage insurance premiums are typically 0.95% of the principal, so on a $4 million 241(a) loan, the borrower would pay mortgage insurance of $38,000 per year. On top of this cost, borrowers pay an FHA application fee and FHA inspection fee, which cost 0.30% and 0.50% of the loan amount, respectively, in addition to other closing costs.
241(a) financing is available for individuals, families, and other entities that own multifamily housing properties.
First, remember that a 241(a) loan is a secondary type of financing, not a primary mortgage. Therefore, one of the main requirements is that the property that will be improved or repaired using the loan proceeds, and the borrower must also have an FHA- or HUD-backed first mortgage.
Second, the project sponsor (the borrower) must have a pre-application conference with their local HUD Multifamily Hub to discuss the proposed improvements to the property. They may then submit an application to determine if the project meets program requirements.
Next, one HUD requirement is that the property owner must provide at least 10% of the total cost of the proposed improvements or repairs. Loans can be made for as much as 90% of the value of a project (95% for nonprofits), and the borrower's DSCR (debt service coverage ratio) must meet certain minimum standards to justify the loan.
It's also worth noting the term "multifamily" is generally defined as a property that has five units or more. Properties with two to four housing units are typically considered to be multi-unit residential properties, while multifamily properties are considered commercial in nature. Section 241(a) loans are designed for the latter.
The Millionacres bottom line
A 241(a) loan can help certain multifamily real estate owners make repairs or improvements to their properties, but they aren't right for everyone. Some eligibility requirements need to be satisfied, and some costs need to be taken into account. But with a government guarantee to lenders, it can be significantly easier for borrowers to obtain a 241(a) loan than other types of multifamily second lien financing.