Key Underwriting Criteria Lenders Look for in Affordable Housing Projects

Getting preapproved for a multifamily loan to finance your affordable housing project is a big step forward, but it's not the final hurdle before closing. Next up is the underwriting phase of the commercial loan origination process. 

During underwriting, lenders (like us) typically assess your project's financial viability, risks, and overall opportunity. After careful analysis, the underwriting team decides whether your project can support the loan amount you've requested.

As you move into underwriting, it's crucial to be prepared with the right documentation and an understanding of key commercial multifamily loan requirements for affordable housing projects. Being thorough can streamline the process, reduce delays, and boost your chances of loan approval.

Let's break down the key criteria lenders usually evaluate during underwriting and how you can get ready for this critical stage.

Key Criteria for Multifamily Loan Decisions

Before you apply for a loan, it helps to know what documents and information lenders generally look for during underwriting. Here's an overview of the criteria the underwriting team might evaluate.

Comprehensive Financial Documentation

Lenders need a clear picture of your project's financial health and viability. Providing comprehensive documentation helps them assess whether your project is financially feasible and aligns with their lending criteria.

You should be prepared to provide the following financial documents:

• Profit and Loss (P&L) Statements: Detailing the financial health of the developer and guarantor.
• Balance Sheets and Cash Flow Statements: Enabling lenders to assess assets, liabilities, and liquidity.
• Pro Forma Financial Projections: Including detailed projections of revenue, expenses, and cash flow.
• Guarantor Tax Returns: To verify income and financial standing for the individual or company guaranteeing the loan.
• Construction-Related Financials: Details on the general contractor’s P&L and history with similar projects.
• Sources and Uses Document: Specifying the project's capital structure and use of funds. This often includes Low-Income Housing Tax Credit equity, tax-exempt bonds, public grants, subsidized loans, private equity/debt financing, and other sources. Be clear about the sources and any terms or dependencies tied to them.

A solid financial package includes all the above documentation with clear and accurate projections and historical financial data. Underwriting analysts typically look for missing information and inconsistencies, so ensuring your numbers are complete and consistent across all documents is crucial.

Risk Assessment

Assessing potential risks provides insight into the likelihood of your project's success. Underwriters usually evaluate the risks associated with your multifamily loan and how you plan to address them.

Be prepared to show that you've conducted a thorough assessment of all potential risk factors, including:

• Market Risk: Can the market support the project? What's the region's economic health and demand for affordable housing?
• Regulatory Risk: Does your project comply with zoning laws, environmental regulations, and other government policies?
• Legal Risk: What potential legal issues might you or the property face?
• Developer Experience: What's the track record and financial strength of the developer and general contractor?

You should also detail your strategies for mitigating any risks you've identified. For example, if you're building an affordable housing development in a volatile market, you might include an analysis of market trends and your plans to mitigate market risk through strategies like flexible pricing or targeted tenant outreach.

Depending on the project's level of risk, the lender might require stronger guarantees, covenants, or cash reserves.

Valuation and Opportunity Assessment

Lenders need to see strong support for your project's value and verify that it has a solid opportunity for market success. This analysis helps justify the loan amount and terms.

They typically use appraisals to establish a project’s value, analyzing market comparisons of sales data, income approaches, and expenses. They also look at cap rates, market studies, and historical market data to understand the project's value and alignment with market needs.

Lenders might use tools like CoStar and internal benchmarks to research market comparisons. You can head off potential concerns by ordering an independent appraisal and attaching it to your loan application. By doing your own thorough research before seeking financing, you help ensure that your project aligns with market needs and values.

Developer Experience and Track Record

Your project team's experience is a critical aspect of risk evaluation and plays a key role in financing decisions. Lenders tend to have more confidence in developers with a strong track record of success.

Underwriters will look for a detailed account of your past projects, especially those in the affordable housing sector. When preparing documentation to showcase your experience, be sure to include:

• Outcomes: Include both financial results and community impact.
• Timelines: Provide details on project development timelines.
• Challenges Faced: Explain how you overcame any hurdles.

• Awards and Recognitions: Highlight any accolades received, if applicable.

By sharing examples of past projects completed on time and within budget, you can demonstrate that you understand what it takes to succeed in the affordable housing sector.

Regulatory Compliance and Zoning

Commercial multifamily loan requirements often include several compliance-related items. Lenders need assurance that your project complies with all local regulations and that no outstanding legal or environmental issues could delay or derail the project.

Be prepared to provide documentation of all necessary zoning approvals, environmental assessments, and any other regulatory requirements that have been met. The official verification of zoning compliance may be in the form of a letter or a completed form, depending on the local jurisdiction and the lender's requirements. If you've obtained any zoning waivers or variances from the local municipality, be sure to include that in your documentation.

Community Impact and Alignment with Lender's Mission

Underwriting criteria for affordable housing loans may include factors that go beyond typical commercial multifamily loan requirements. Lenders, especially those with a mission-driven focus (like us), often want to ensure the project will meet an acute demand, positively impact the community, and align with their organizational goals.

Your documentation should include an analysis of how the project aligns with broader community goals. If you're working with a mission-driven lender, it's helpful to understand their mission so you can articulate how your project supports their goals, particularly in terms of addressing affordable housing needs for underserved populations.

Preparing for the Underwriting Process

While there's no standard timeline for multifamily loans, if everyone is on the same page, a project can sometimes be underwritten in a week. During that time, expect frequent communication with the lender as they analyze the project details. You might receive clarification questions and requests for more information throughout the process.

Knowing that the fate of your project financing rests with an underwriting team can be stressful, but there are steps you can take to make the process go as smoothly as possible.

Organize Documentation

As you move forward with your project, establish a central place for your team to store digital copies of every form, financial statement, and other documents. Create a plan to manage version control and review all documents for accuracy. Making a checklist of all the documents you'll need to provide can help ensure you're prepared for underwriting when the time comes.

Be Proactive in Addressing Risks

Every real estate investment involves risk. Instead of glossing over potential pitfalls, it's better to be upfront about the specific risks your project faces and show that you have plans in place to address any worst-case scenarios.

Maintain Clear Communication

Clear communication is key in any project, and the commercial loan origination process is no different. Keep an open line of communication with your lender throughout underwriting, and double-check all written communications for accuracy and clarity before sending.

Common Underwriting Pitfalls to Avoid

No matter how confident you are in your affordable housing project's prospects for success, missteps during the underwriting process can lead to delays or even derail your project. Here are some common pitfalls to watch out for.

Poor Communication

Be clear and consistent in every interaction with your lender, whether in person, over the phone, or via email. Also, be prepared to respond to requests for additional information promptly. The day your loan moves into underwriting isn't the best time to go on an extended vacation.

Incomplete Documentation

Presenting a well-organized, thorough, and complete document package signals to the lender that you've carefully considered all risks, financial considerations, and other project details. Submitting incomplete financial statements or leaving out key risk assessments can raise questions about your readiness.

Underestimating Risks

Downplaying potential risks doesn't benefit anyone. If you've identified risks during your own due diligence, chances are the lender will spot them too. It's better to show that you've carefully considered all market, regulatory, and legal risks—and have plans to mitigate them.

Secure Financing for Your Affordable Housing Project

Every piece of information you provide gives lenders insight into your project's viability and your ability to repay the loan. Lenders (like us) want to see that your affordable housing project is financially viable, meets acceptable risk levels, and will positively impact the community.

Thoughtful preparation for the underwriting stage can increase the chances of a positive outcome on your loan application. This includes providing complete, accurate documentation and being clear, direct, and timely in all your interactions with the underwriting team.

Ready to bring your affordable housing project to life? Reach out to our affordable housing team to get additional guidance or to start the loan application process.