Insights

Lowering HUD Mortgage Insurance Premium with Green Improvements

March 29, 2024

Lowering HUD Mortgage Insurance Premium with Green Improvements

Since March 2016, more than 1,800 multifamily properties financed with HUD loans have qualified for lower mortgage insurance premiums (MIP) through an incentive program to encourage green building. Lowering your MIP offers an opportunity to save substantially over the life of the loan while building a new multifamily property or retrofitting an existing multifamily building.

“HUD’s Green MIP program offers the lowest possible mortgage insurance for new construction, substantial renovation, refinancing or acquisition loans through HUD,” says Phiet Nguyen, a Managing Director with Greystone. “Typically, MIP rate on a HUD multifamily loan is 0.60% for existing building, but if it qualifies for the Green MIP program, the MIP is just 0.25%.”

The goal of the Green MIP program is to incentivize builders and developers to use energy efficient materials and systems, including high-performance HVAC and insulation systems and low-flow water fixtures, in new construction and when renovating multifamily buildings.

“HUD is promoting a higher standard for energy efficiency, which provides a better living standard for tenants and reduces utility bills for landlords, especially compared to older projects from the 1990s or older,” Nguyen says.

Advantages of HUD’s Green MIP Program

The Green MIP program offers an extra incentive to implement energy efficient systems that may attract tenants, allow for increased rent, lower utility bills and potentially add value to the property.

“It makes sense to apply for a HUD Green MIP loan for ground-up projects because many building codes today are generally already meeting a green standard,” Nguyen says. “You would likely find that qualifying for the Green MIP program is fairly simple for new construction. You’re not spending more to make the building green in many jurisdictions since you’re already building to meet modern codes.” 

Non-Green MIP rates are typically .65% for new construction and .60% for existing buildings.

The savings generated by reducing the MIP to .25%, particularly when they accumulate over the life of the loan, are the biggest advantage of the program, he says.

For example, on a $30 million loan, your annual MIP savings would be more than $100,000 with the lower rate. Nguyen says many owners hold their multifamily properties for five to six years, which would generate savings of $500,000 to $600,000 over the hold period.

“On an existing project, the decision about whether to apply for the Green MIP program depends on how long you plan to keep the property, the size of the loan and the budget needed to make necessary repairs to certify for a specific green program,” Nguyen says. “Generally, if you plan to hold the property for decades, it’s a no brainer to apply for the Green MIP program.”

For example, he explains, if you have a $10 million loan and your MIP is reduced by 35 basis points, you can save approximately $35,000 annually. If the renovation budget is $200,000, it will take about six years to recoup your costs.

But if the renovation budget is $1 million, that means it will take more than 30 years to recoup your investment. If your loan is larger, such as $50 million, your annual savings will be approximately $175,000, which reduces the amount of time needed to recoup your costs. 

Qualifying for Green MIP

Whether you’re building a new multifamily development or renovating an existing community, the Green MIP program requires documentation of the energy efficient features and sustainable materials used in the project. Borrowers should choose from a list of more than a dozen approved certification programs for new construction and rehabilitation, such as LEED, ENERGY STAR New Construction Multifamily, ENERGY STAR Multifamily Hi-Rise, EarthCraft, Enterprise Green Communities or the National Green Building Standard (NGBS).

“On new construction projects, the only extra cost you generally incur for the Green MIP program is the green consultant to look at the design and provide an energy rating estimate,” Nguyen says. “That same consultant returns when the property is built to review actual energy use before applying for the certification.”

The process is slightly different for existing properties, which have several paths to achieve Green MIP.

“For buildings that are less than three years old but are recently stabilized, you need to do an energy consumption modeling based on the project’s plans and specs, go through the process of applying for a green standard certification, then apply for Green MIP in the HUD loan application,” Nguyen says. “If a building is more than three years old and hasn’t been renovated, you first do an energy consumption analysis based on actual energy usage in the last 12 consecutive months, then develop a renovation budget with energy efficient retrofits to meet a certain green standard and submit the loan application to HUD that demonstrates the project will be green after the renovations.”

In the latter case, if the HUD application is approved, borrowers will have 12 months after closing of the loan to make the green improvements. Then they must bring in an energy consultant to certify that the work is complete, and that the building’s performance is up to the green standard indicated in the HUD application, Nguyen says.

In all cases, per the MAP Guide, owners of multifamily properties with 20 or more units with Green MIP must provide annual evidence of energy efficient performance with an ENERGY STAR Statement of Energy Performance score of 75 or more out of 100.

“Many developers are already committed to green building standards and automatically will build to meet green certification requirements to save on utility costs,” Nguyen says. “It makes sense to factor in the Green MIP option when considering HUD financing.