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The FHA 207m Program

Print Version

With interest rates rising and financing for community development and rehabilitation becoming more scarce, an increasing number of community owners and developers are looking to HUD’s FHA 207m program as a source of financing for developing new communities or upgrading older ones. Little used in the 1990s, the 207m program is not a direct loan program. It is a mortgage insurance program that allows community owners and developers to obtain financing for their renewal project from approved HUD lenders by first obtaining mortgage insurance.

What makes the program attractive? It provides a combination of fixed-rate construction and permanent loans with terms of 30 to 40 years. Loan amounts are up to 90 percent of value, which allows community owners and developers to finance nearly all their project costs. The borrower’s liability is limited through a non-recourse provision, and the loans are assumable with consent and prepayable with no penalty after 10 years. A five-year prepayment option is available for a slightly higher rate. The loans may also be used as a construction-only loan if it is paid off before maturity. Community owners and developers have up to three years to complete their project. Generally for a renewal project, about 15 percent of the loan must go toward capital improvements, such as new infrastructure or a community clubhouse. Funds are not to be used for the purchase of homes.

Another possibility is to use the 207m program as a construction loan and “mini-perm,” which allows the developer to “refinance out” with a new lender once the property is fully occupied and is experiencing stable cashflow. The interest rate, though negotiated between the borrower and lender, is always a fixed-rate for the term of the loan.

The loan amount is based on the number of homesites in the community, however there must be at least five homesites for the community to be eligible. The base maximum mortgage limit is $17,460 per space, which may be increased up to 140 percent based on an area’s pre-determined high cost factor.

The Application and Award Process

Preapplication Coordination. The applicant has an initial conference with their local HUD office, which has been previously arranged by a qualified mortgagee (lender), to determine the preliminary feasibility of the project before he or she submits a site appraisal and market analysis (SAMA) application for a new community or a feasibility application for a community upgrade. An environmental assessment is also required. If sufficient information is presented at the preapplication meeting showing the project to be feasible, the HUD staff may invite the developer to submit “direct to firm” application processing, skipping over the SAMA and conditional application processes. In this case, the SAMA and conditional application fees are still applicable.

Application Procedure. Assuming HUD has deemed the project feasible, the developer or community owner then submits an application for SAMA or feasibility application. The application for conditional and firm commitment is submitted by the applicant through a HUD-approved mortgagee to the local HUD multifamily field office.

Award Procedure. The local HUD multifamily field office decides whether to approve or reject applications.

Deadlines. Deadlines are established on a case-by-case basis by the local HUD office.

Processing Time. Processing time will depend on the degree of preparation by the applicant and the current workload of the local HUD office. Many can be approved in less than four months, but often can take from six months or more, depending on the applicant’s willingness to “say on top” of gathering the necessary required documentation.
Appeals. If an application is rejected, HUD will provide reasons. The applicant can resubmit an application with their lender’s concurrence.

Fees. The application fee is $3 per $1,000, plus audit and inspection fees. The HUD inspection fee may not exceed $5 per $1,000 of the mortgage amount. Reserves for operating deficits will be required prior to closing, which may be secured through letters of credit or other approved financial instruments.

Downsides to the FHA 207m Program

Due to the relative inactivity of the program over the past decade, some developers that have sought financing under the program have encountered local HUD offices with little or no experience with the 207m program. As a result, developers have found themselves having to educate local HUD offices or have hired consultants to help them wade through what can be a cumbersome and time-consuming application process.

Click here to go to HUD’s program handbook on the 207m program. 

© 2016  by Manufactured Housing Institute. All rights reserved.