Section 542(c) Risk Sharing: HUD Glossary

Key points

• HFAs, not MAP lenders, originate and underwrite 542(c) loans under their own HUD-approved standards.
• Level I HFAs take 50 percent or more of the loss risk in 10 percent increments; Level II HFAs take 10 or 25 percent.
• Projects must be affordable housing, meeting the qualified low-income housing project test of Internal Revenue Code Section 42(g).
• Acquisition or refinance without substantial rehabilitation requires a 20-year affordability commitment, 93 percent average occupancy and other tests.
• Risk-share loans are not eligible for Section 223(a)(7) or Section 241(a).

How risk sharing works

Section 542 directs HUD to provide new forms of federal credit enhancement for multifamily loans, and 542(c) specifically creates risk sharing with qualified HFAs. The regulation at 24 CFR 266.1 states that qualified HFAs are authorized to underwrite and process the loans while HUD provides full mortgage insurance on affordable projects they process. In exchange for that delegated authority, the HFA reimburses HUD for its agreed share of any loss.

There are two participation levels. Level I HFAs elect to take 50 percent or more of the risk of loss, in 10 percent increments, and use their own underwriting standards. Level II HFAs take 10 or 25 percent of the risk, depending on the loan-to-value or loan-to-replacement-cost ratio, and use underwriting standards and loan terms approved by HUD. Part 266 states that the extent to which HUD directs an HFA's underwriting, loan terms and servicing is related to the share of risk the HFA takes. On premiums, HUD's September 23, 2025 notice keeps 542(c) loans at 25 basis points upfront and annually, multiplied by the percentage of risk FHA assumes, so a loan where FHA holds half the risk carries 12.5 basis points.

Which projects qualify

Risk-share loans are for affordable housing as Part 266 defines it: a project meeting the qualified low-income housing project requirements of Section 42(g) of the Internal Revenue Code. Projects must have at least five rental units on one site. New construction and substantial rehabilitation are eligible. Existing properties can be acquired or refinanced without substantial rehabilitation only if all of the following are met:

• The financing preserves affordable housing, with the property kept affordable for at least 20 years regardless of prepayment.
• Average occupancy over the most recent 12 months is at least 93 percent, including rent in arrears.
• The loan being refinanced has not been in default in the 12 months before application.
• A capital needs assessment is completed, repairs are escrowed and replacement reserves are funded.
• If a HAP contract is in place (outside certain Section 202 projects of Level I HFAs), the owner agrees to a 20-year renewal and sizing uses the lower of assisted rents or comparable market rents.

How 542(c) differs from MAP programs

The practical differences are who decides and what rules apply. Under MAP, a HUD-approved lender underwrites to the MAP Guide and HUD issues the commitment. Under 542(c), the HFA underwrites to its approved standards and issues its own commitment, and the mortgage forms are those the HFA approves for its jurisdiction. Part 266 still requires a single first lien, a single asset mortgagor and full amortization, with limited exceptions such as certain Level I loans.

There are also portfolio consequences. The MAP Guide states that risk-share loans are not eligible for a 223(a)(7) streamlined refinance (by statute) or for a 241(a) supplemental loan. An owner with a risk-share loan who wants to refinance into a MAP program would look at a 223(f) refinance instead.

When a borrower should consider it

Risk sharing fits affordable owners already working with an HFA, often alongside tax-exempt bonds or tax credits that the same agency allocates. It can make sense for preservation deals where the HFA's affordability goals align with the owner's. For market rate or lightly restricted properties, the program generally does not apply, and a MAP 223(f) or 221(d)(4) is the usual route. In a bridge-to-HUD context, an affordable owner should compare the 542(c) and MAP paths early, because the occupancy, affordability term and lender relationship differ, and the choice determines which approvals the bridge must carry the property through.

Where to go next

For the MAP refinance alternative to risk sharing, see HUD 223(f) loans.

For how HUD programs compare with other affordable financing, see HUD vs. agency and bank loans.

Related guides: Affordable Housing Preservation with HUD Financing; Refinancing a LIHTC Property with a HUD Loan; Refinancing a Section 8 HAP Property with a HUD Loan.

Related terms: HAP Contract: What It Means in a HUD Refinance; What Is a HUD Section 223(f) Loan?; What Is a HUD Section 223(a)(7) Refinance?; Regulatory Agreement: The HUD Contract That Governs Operations.

For portfolio figures by state, metro and program, see the HUD multifamily data hub. Bravo Capital’s record: all 26 HUD firm commitments received since April 2022 have closed, totaling $526.0 million (HUD Closing Scorecard).