HUD does not have hard net worth or liquidity requirements, such as
cash equal to a certain amount of debt service payments, or net worth equal
to a certain percentage of the loan, etc.. It’s more of a gut check.
However, borrowers who are thinly capitalized are unlikely to be accepted
as sponsors. HUD wants to see sponsors who have the ability to step in and
cover debt service payments in a worse case scenario, and who are not
overleveraged in their investments and personal real estate portfolio.
Many times we deal with sponsors who are thinly capitalized but want to
identify equity partners or investors “down the road”, which is not
acceptable for HUD. We need to show cash is available, or at least a
realistic plan is in motion to cover equity needed at closing, early on in the
process, rather than rely on hypotheticals.