Why Creating an FHA/VA Mortgage Program for Developers Is a Good Idea
Lack of affordable mortgage programs for small businesses and developers contributes to the housing shortage in the United States. Primarily, commercial lenders guarantee and fund mortgages for small businesses and developers. These loans, known as investor and commercial mortgages, are very restrictive, resulting in only small pools of qualified applicants. Creating a federally guaranteed investor mortgage combined with an optional construction loan will assemble a larger base of qualified borrowers financially positioned to purchase and build more housing inventory.
Forming a federally backed investor mortgage and construction loan program does not require a large government expenditure initially. It only needs the full faith and promise of the United States government as a guarantee. Commercial banks could qualify the applicants and issue loans by utilizing existing systems servicing Fair Housing Authority (FHA) and Department of Veterans Affairs (VA) mortgage programs. The proposed program would be administered by the Department of Housing and Urban Development (HUD) and the VA, bypassing the need to create a new federal agency.
Creating such a program, however, would require legislative authorization from Congress as it would expand the federal government’s role from guaranteeing primary residential mortgages.
This proposed program would feature:
- No primary occupancy requirements
- 8% down payment
- 5% down payment for honorably discharged veterans
- Honorably discharged veterans allowed to withdraw earned government retirement funds tax free for downpayment
- 750+ credit scores of applicants
- Maximum loan limit of $1.5 million
- Interest rates lower than market available mortgages
- 30-year monthly amortization rates and payment terms
- Mortgage insurance requirements
- Optional construction loan for 80% of the appraised constructed or renovated value combined with the mortgage
- Full borrower recourse
- One loan at a time, previous loans must be paid
- Housing properties only
- Multiple parcels allowed
- Borrower required financial reserves
- No prepayment penalty
The program differs from the FHA 203k product by not requiring the borrower to occupy the property as their primary residence and by permitting both renovation and construction on land purchases.
A federally guaranteed investor mortgage program has many benefits. Having larger pools of qualified borrowers encourages the development of properties like duplexes, fourplexes, and other small apartment buildings in urban areas often overlooked by traditional developers. This not only promotes more infill development, it also addresses the important Missing Middle Housing concept by supplying more units at competitive rents for the middle-class workforce near their employment. Moreover, by using available local municipality initiatives, the owners could offer some or all their units at below market rents – potentially adding more affordable housing inventory as well. Finally, establishing larger pools of qualified borrowers provides developers of different races, genders, and ethnicities more opportunities to create generational wealth through a proven source: real estate.
The main argument against creating a federally guaranteed investor mortgage is the elevated risk of borrower default. While this concern is valid, there are several layers of protection built in to mitigate it. For example, the full recourse requirement ensures all borrowers’ assets are subject to government ownership to offset the default risk. Second, requiring a mortgage insurance fee along with the monthly mortgage payment for the loan term supplies additional funds to the federal government, reducing the risk. Limiting construction loans to 80% of the completed project’s appraised value provides a financial buffer. Last, in addition to meeting all the loan conditions, borrowers would be required to submit a detailed operational business plan for final approval.
While federally backed loan programs to purchase and build housing units already exist, they are designed primarily for larger projects. There are no federally guaranteed mortgage and construction programs designed for small businesses and developers doing small projects. Omitting this category threatens to restrict the potential development of housing inventory critically needed throughout the United States. To help boost the supply of housing, a federally guaranteed mortgage and construction program for small developers should be created.
This idea of merit originated from our Housing Ideas Challenge, in partnership with Learning Collider, National Zoning Atlas, and Cornell’s Legal Constructs Lab. Find additional ideas to address the housing shortage here.