Use the glossary page to search terms and definitions in alphabetical order. You can use these definitions as a resource for terms that appear on other pages of our website.
Active Principals are individuals or entities who singly or with others, direct and control the borrower and are responsible for the borrower’s ability to execute any and all actions for the benefit of the project, regardless of the extent of their equity interest.
Area Median Income (AMI)
The area median income (AMI) is a statistic generated by HUD for purposes of determining the eligibility of applicants for certain federal housing programs. The AMI is the middle number of all of the incomes for the given area. Each year, HUD calculates the median income for every metropolitan region in the country. HUD focuses on the region — rather than just the city — because families searching for housing are likely to look beyond the city itself to find a place to live.
Basis Points (bps)
Basis point (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument. The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.
Builder's and Sponsor's Profit and Risk Allowance (BSPRA)
BSPRA is equal to 10% of all eligible costs, excluding land value (for new construction) or as-is value (for substantial rehabilitation projects), as a mortgageable cost. Note, however, that BSPRA is only a mortgageable cost used for underwriting purposes; BSPRA is not a source of cash for payments of any amounts due to the contractor or otherwise. BSPRA is a non-cash cost and non-cash source in the underwriting and settlement statements.
Capital Needs Assessment (CNA)
A CNA is a report on a property that estimates its repair and replacement needs over an extended period of time, often analyzing the way in which resources need to be accumulated to pay for these needs (replacement reserve analysis). A CNA is also known as a Project Capital Needs Assessment (PCNA), Physical Needs Assessment (PNA), Physical Condition Assessment (PCA), reserve study, HUD Comprehensive Needs Assessment (CNA), or capital plan. In January 2017, HUD released a new CNA e-Tool suite of software, which is now the standard platform for capital needs assessments for HUD.
A Capital Needs Assessment (CNA) identifies needed repairs for a property as either critical or non-critical. Typically, critical repairs must be completed prior to initial/final closing of a HUD-insured mortgage and/or RAD conversion. However, HUD will consider a waiver to allow some critical repairs to be completed post-closing if an approved Corrective Action Plan is in place.
Debt service is payment of interest and principal on a debt (such as a mortgage), typically made on a monthly basis. For HUD-insured loans, debt service also includes the monthly mortgage insurance premium.
Debt Service Coverage (DSC) / Debt Service Coverage Ratio (DSCR)
AKA Debt Coverage Ratio (DCR)
Net Operating Income (NOI) divided by Annual Debt Service on the loan. The ratio of cash flow available to pay for debt to the total amount of debt payments to be made. A ratio of 1.0 means breakeven.
An account that a mortgage servicer establishes on behalf of a borrower to pay taxes, insurance premiums, mortgage insurance premiums or other charges when they are due. Sometimes referred to as a reserve account.
Federal Housing Administration
An agency within HUD that provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single-family, multifamily, healthcare and manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934. FHA was placed under the administration of HUD in 1965.
FHA-Insured or HUD-Insured
A loan that is insured by the Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development (HUD) is said to be FHA-insured, commonly referred to as HUD-insured.
The firm commitment sets forth the terms and conditions on which HUD will insure a loan including conditions that must be met prior to closing.
Fully Amortizing Loan
A loan that is paid off completely through regular, periodic payments without requiring a balloon payment at the end (or beginning) of the loan.
Furniture, Fixtures and Equipment (FF&E)
Furniture, fixtures and equipment, abbreviated FF&E or FFE, are movable furniture, fixtures or other equipment that have no permanent connection to the structure of a building or utilities.
Ginnie Mae (GNMA)
Government National Mortgage Association is a government-owned corporation within HUD that guarantees securities backed by mortgages that are insured or guaranteed by other government agencies. Popularly known as Ginnie Mae.
Section 8 Housing Assistance Payments Contracts (HAP Contracts) provide that the resident pays a portion of the Contract Rent (the resident’s portion is limited to a percentage of the resident’s income), with the remainder of the Contract Rent being paid under the HAP Contract as a Housing Assistance Payment. For example, if the Contract Rent is $600 and the resident’s portion is $200, the HAP portion would be $400.
A loan that was formerly FHA-insured, but that is now owned by HUD (as a result of paying an FHA mortgage insurance claim), is said to be HUD-held.
Identity Of Interest (IOI)
HUD uses the term identity of interest to broadly encompass what commercial parties would regard as various levels of affiliation. Identity of interest applies to, among other circumstances, relationships between (i) a lender and borrower, (ii) property seller and borrower, (iii) borrower and general contractor, and (iv) borrower and architect. Determining whether or not an identity of interest exists and how it may affect a transaction can be quite complex.
Initial Operating Deficit Escrow (IOD)
An initial operating deficit escrow is required on new construction and substantial rehabilitation loans to provide funding for operating expenses and debt service when net income is not available during the initial lease-up and stabilization period.
Interest Rate Reduction (IRR) Or Loan Modification
HUD’s Interest Rate Reduction (IRR) program, commonly referred to as a loan modification, is a program which allows for an interest rate reduction on a loan which is currently HUD-insured and not in default.
Loan To Cost (LTC)
In the case of a refinance or acquisition loan, loan to cost (LTC) is the ratio of debt compared to the cost of acquiring the property. In the case of a rehabilitation or construction loan, LTC is the ratio of debt compared to the cost of building the project.
Loan To Value (LTV)
Loan to value is the ratio between the loan amount and the value of the property. This ratio is commonly expressed to a potential borrower as the percentage of value a lender is willing to finance.
Low-Income Housing Tax Credit (LIHTC)
The Low-Income Housing Tax Credit (LIHTC) program was created in the Tax Reform Act of 1986, and it includes both 9% tax credits that are competitively allocated at the state level and 4% tax credits which accompany certain types of tax-exempt bond financing provided at either the state or local level. Owners of LIHTC properties can claim credits against their federal income tax liability for up to ten years after the property is completed and leased up, provided that the property remains in compliance with LIHTC requirements for a total compliance period of 15 years, the first ten plus five. Typically, a LIHTC property is owned by a limited partnership or limited liability company in which the real estate developer is directly or indirectly the general partner or managing member and in which corporate investors hold the remaining ownership interests.
Mechanical, Electrical And Plumbing (MEP)
Mechanical, electrical, and plumbing (MEP) refers to these aspects of building design and construction.
Mortgage Insurance Premium (MIP)
For each HUD-insured mortgage loan, HUD charges an initial mortgage insurance premium (MIP) at closing plus a monthly MIP over the life of the loan. The MIP amounts are calculated to cover HUD’s risks.
Multifamily Accelerated Processing (MAP)
Multifamily Accelerated Processing (MAP) is designed to establish national standards for approved lenders to prepare, process and submit loan applications for Federal Housing Administration (FHA) multifamily mortgage insurance. MAP is terminology used by HUD encompassing all multifamily finance programs.
Multifamily Accelerated Processing (MAP) Guide
The Multifamily Accelerated Processing (MAP) Guide is HUD’s manual for FHA-insured multifamily loans. The MAP Guide provides guidance for HUD staff, lenders, third-party consultants, borrowers, and other industry partners. Topics include mortgage insurance program descriptions, borrower and lender eligibility requirements, application requirements, underwriting standards for all technical disciplines and construction loan administration requirements. It is intended to cut the time required to approve loan applications and to assure consistent application of program requirements and credit standards across all HUD processing offices. The most recent version was issued in January 2016.
Net Operating Income (NOI)
NOI is the net operating income which is arrived at by deducting operating expenses from effective gross income. Capital expenditures and debt service are not part of the NOI calculation.
A Capital Needs Assessment (CNA) identifies needed repairs for a property as either critical or non-critical. Typically, non-critical repairs must be completed within one year after initial/final closing of an FHA-insured mortgage and/or RAD conversion. However, there are some exceptions and a period longer than 12 months may be allowed, with HUD approval, for certain non-critical repairs.
Put simply, a non-recourse loan means the borrower is not personally liable for payment should the loan default. However, there may be various non-recourse carveouts or exceptions.
Project Rental Assistance Contract (PRAC)
Beginning in 1991, HUD replaced the Section 202/8 and Section 202 PAC programs with a capital grant program under which HUD provided rental assistance through a Project Rental Assistance Contract (PRAC) for projects developed with Section 202 or Section 811 Capital Advances. The PRAC provides a rental subsidy that covers the difference between the HUD-approved operating costs of the project and the tenant’s contribution toward the rent.
Replacement Reserve Account / Reserve Fund For Replacements
Replacement Reserve Account or Reserve Fund for Replacement is an account required to be established and maintained with the lender with a specified monthly amount to be deposited, for defraying certain costs of replacing major structural elements and mechanical equipment of the insured property, and for other capital expenditures. The balance in the account is a restricted asset and disbursements can only be made with HUD’s consent. HUD currently requires that a Project Capital Needs Assessment (PCNA) be performed every 10 years to determine, among other things, whether the monthly deposits should be adjusted.
Residual receipts refer to certain funds held by borrowers or held by a lender on behalf of borrowers (typically but not always non-profit owners) who are subject to regulation by HUD. Generally speaking, residual receipts are calculated in the same fashion as Surplus Cash. Residual receipts most often are required to be held as a condition of a Section 8 HAP Contract or other HUD program, not a condition to a HUD-insured loan.
Section 8 And Section 8 Programs
Section 8 of the Housing Act of 1937, often called Section 8, authorizes the payment of rental housing assistance by HUD to private landlords. HUD manages Section 8 programs including Project-Based Rental Assistance and the Housing Choice Voucher program. See definitions for Section 8 Project-Based Rental Assistance and Section 8 Project-Based Vouchers for additional information.
Section 8 Project-Based Rental Assistance (PBRA)
A Section 8 Housing Assistance Payment (HAP) contract is called project-based if the rental assistance is attached to the property (i.e., the assistance remains with the property when a tenant moves). Section 8 assistance that is awarded to and remains with the tenant is called tenant-based (for example, the Housing Choice Voucher program is primarily tenant-based).
Section 8 Project-Based Vouchers (PBVs)
A public housing agency may allocate (or project base) up to 20% of its Housing Choice Vouchers to specific properties by contracting with property owners for a term of up to 15 years, with the possibility of renewal for up to an additional 15 years. Usually, no more than 25% of the units in a property can have PBVs. Tenants pay 30% of their adjusted income for rent and utilities. PBVs are attached to the property meaning the Section 8 subsidy stays with the housing unit when a tenant moves.
Section Of The Act (SOA)
The Section of the Act code refers to the Section of the National Housing Act under which the loans are insured.
Sponsor's Profit And Risk Allowance (SPRA)
SPRA is 10% of the total estimated cost of: architect’s fees, carrying and financing charges, legal, organizational, and audit expenses.
Traditional Application Processing (TAP)
Traditional Application Processing (TAP) applies to multifamily loans that are not permitted to be processed under the MAP Guide. Applications for TAP processing require more work and responsibility by HUD staff, and accordingly, a higher application fee may be charged. Projects not eligible for MAP, which may be submitted under TAP include:
Applications submitted by HUD-approved multifamily lenders who are not approved to submit MAP applications
Applications where there is an identity of interest between the lender and the borrower or affiliates of either
Applications for mortgage insurance under Programs or Sections of the Act not covered by MAP (e.g. New Construction Cooperatives under Section 213)
Transfer Of Physical Assets (TPA)
Transfer of Physical Assets (TPA) is the sale of a property subject to a HUD-insured loan and the assumption of the loan. More broadly, it also includes the direct or indirect transfer of control of a borrower. This can be through the transfer of ownership interests in the borrower or upper tier entities in the borrower ownership structure and certain other transfers of ownership interests in the borrower or such upper tier entities.
U.S. Department Of Housing And Urban Development (HUD)
The Department of Housing and Urban Development (HUD) was established as a Cabinet Department by the Department of Housing and Urban Development Act in 1965. HUD is the Federal agency responsible for national policy and programs that address America’s housing needs, that improve and develop the Nation’s communities and enforce fair housing laws. HUD’s business is helping create a decent home and suitable living environment for all Americans, and it has given America’s communities a strong national voice at the Cabinet level.
Working Capital Escrow (WC)
The Working Capital Escrow is required on all new construction and substantial rehabilitation loans and is designed to cover the cost of initial marketing and rent-up, FF&E (not paid from loan proceeds), project operating expenses that are not covered by project income or the initial operating deficit escrow in the first operating year, shortfalls in interest, taxes and property insurance above the amounts capitalized in the mortgage. A portion of the escrow may also be used as construction contingency to pay for cost overruns, HUD-approved change orders and other miscellaneous expenses which are not included in the mortgage and are required for new construction and substantial rehabilitation proposals.