What is MIP in HUD Multifamily Loans?

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What is MIP in HUD Multifamily Loans?

• Mortgage Insurance Premium, commonly referred to
  and abbreviated as MIP, is something unique to
  FHA Multifamily loans. The Federal Housing
  Administration (FHA) is a division within the
  U.S. Department of Housing and Urban Development
  (HUD). The purpose of the FHA is to provide
  mortgage insurance on loans made by FHA-approved
  lenders throughout the United States.
• FHA insures both single family and multifamily
  properties. In the multifamily commercial world
  these loans are commonly referred to as HUD
  loans. Technically, HUD is not the lender, they
  are only the insurer of the loans. In other
  words, the companies that originate the loans are
  the lenders and HUD through the FHA make sure the
  loans meet the criterion to qualify for the full
  faith and credit of the federal government.

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The point is that because HUD doesnt generate
any revenue from the interest of the loan, they
do need to collect a premium, just like any
insurance company would. The principle behind
insurance is that many individuals or companies
contribute a small amount to guard against any
catastrophic losses. It is the exact same premise
with HUD insuring the multifamily loans. Thus
the need for MIP. In the commercial multifamily
side of FHA, the current structure is that the
MIP lasts for the duration of the loan. It is
also a fixed amount. For example, the MIP rate on
a 221(d)(4) loan is 65 basis points (.65) for a
market rate project. Market rate meaning
prevailing rents are charged. Affordable project
(4 tax credits subsidized) have a reduced MIP
rate of 35 basis points. The purpose here isnt
to list all the different MIP amounts however,
it is material to note they do vary based on the
loan type. As noted, MIP lasts for the duration
of the loan and it is a fixed rate. The amount
you actually pay does decline over time because
the MIP payment is based on the outstanding
principle balance of the loan. As the loan
amortizes, the principle balance declines and in
turn the MIP payment declines as well.
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Most people want to minimize the amount the pay
and may shy away from an FHA because of the MIP.
If so, it is likely a uniformed decision because
there are benefits of this mortgage insurance.
Because the loans meet the HUD underwriting
criteria and receive this insurance, there are
many features to this loan that make it unique
and incredibly attractive. The features include
interest rates below conventional rates by .5
1. They are non-recourse loans. The Debt
Coverage Ratios (DCR) are lower and Loan To
Values (LTV) are higher than any other commercial
multifamily loans in the country. This means
multifamily investors and developers can reduce
their own exposure, maximize their cash on cash
returns and preserve capital for additional
projects thus allowing them to control more real
estate. A real estate investor that is
unfamiliar with commercial multifamily HUD
mortgages may not know the significant advantages
they have over conventional bank or even agency
loans. First HUD commercial multifamily mortgages
offer the highest leverage percentages in the
market, that means you control more real estate
with less cash out of pocket. Second, HUD loans
also have the longest fixed rate terms available,
up to 35 40 years, which means no forced
refinancing with balloon payments.
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Third, the HUD fixed rate is even lower than what
is offered by conventional bank or agency loans.
Fourth, HUD loans are fully Non-Recourse, meaning
only the property can be used as collateral in
the event of default. Article Resource
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