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What Are the Benefits of HUD 223(f) Loans?
HUD 223(f) loans offer some of the best terms in the industry for the acquisition and refinancing of multifamily properties. These loans are non-recourse, offer high leverage, and have low interest rates.
Exploring the Benefits of Using HUD 223(f) Loans
HUD 223(f) loans offer some of the best terms in the industry for the acquisition and refinancing of multifamily and apartment properties. These loans are non-recourse, offer high leverage, low interest rates, and lenient DSCR requirements.
While HUD 223(f) loans have many benefits, they are often misunderstood. In fact, many in the industry mistakenly believe that FHA 223(f) loans are only available for low-income housing, nonprofits, and affordable housing projects. However, this is not the case. Due to these misconceptions, many market-rate borrowers miss out on one of the multifamily industry's most affordable, highest-leverage financing tools.
What Are the Terms for HUD 223(f) Loans?
The terms of HUD 223(f) loans are as follows:
Loan amount: $1 million, no set maximum
Terms: Between 10 and 35 years
Leverage: Up to 85% LTV for market-rate properties, 87% LTV for affordable properties, 90% LTV for properties using rental assistance.
Interest rates: Fixed for the life of the loan. Includes a mortgage insurance premium, or MIP.
DSCR requirements: 1.18x for market-rate properties, 1.15x for affordable properties, and 1.11x for rental assistance properties.
What are the advantages of HUD 223(f) loans?
HUD 223(f) loans offer some of the best terms in the industry for the acquisition and refinancing of multifamily and apartment properties. These loans are non-recourse, offer high leverage, low interest rates, and lenient DSCR requirements.
The advantages of HUD 223(f) loans include:
- Low, fixed interest rates
- Loans are fully assumable (with FHA/HUD approval)
- Non-recourse, limiting risks for developers
What types of properties are eligible for HUD 223(f) loans?
HUD 223(f) loans offer incredibly generous terms-- including 35-year, fully amortizing, fixed-rate financing, and nearly unbeatable leverage. Property types that can be financed with a HUD 223(f) loan include:
- Must have 5+ residential units
- Must have complete kitchens and bathrooms for each unit
- Can be row, walkup, detached, semi-detached, or elevator-type rental or cooperative housing
- Can be student housing, but multiple rents cannot be derived from one unit and rents need to be similar to comparable multifamily properties
- Can be market-rate, affordable, or rental assisted/subsidized (i.e. Section 8, Section 202)
- Cannot be an assisted living, skilled nursing, or memory care property (though independent living facilities for seniors are allowed)
- Must have all construction and major rehabilitation finished three or more years before beginning the HUD loan application process
What are the requirements for HUD 223(f) loans?
HUD 223(f) loans have terms including:
- Loan Amount: Minimum loan amount of $1 million (exceptions can be made on a case by case basis)
- Loan Term: Minimum loan term of 10 years, and a maximum term of 35 years (or 75% of the property's remaining economic life)
- Leverage:
- Market rate properties: 83.3% LTV
- Affordable properties: 85% LTV
- Rental assistance properties: 87% LTV, 90% LTV for properties with 90% or more rental assistance
- Interest Rates: Fixed, terms range from 4.10% to 4.75% (including MIP), as of Jan. 2019
- DSCR:
- Market rate properties: 1.17x minimum DSCR
- Affordable properties: 1.15x minimum DSCR
- Rental assistance properties: 1.11x minimum DSCR
- MIP: 1% upfront mortgage insurance premium for all property types, then, annual MIP of:
- 0.65% for market rate properties
- 0.45% for affordable properties (typically must be Section 8 or new money LIHTC projects to qualify)
- 0.25% for Energy Star SEDI (Statement of Design Intent) certified properties
- FHA Application Fee: 0.30% of the total loan amount
- Cash Out: For 223f refinances, cash out is allowed under specific conditions. LTV must be at least 80% (including transaction costs in the loan amount). At that point, 50% of funds above 80% adjusted LTV are released, with the remaining 50% to be released after property rehab is complete.
- Repair Limitations: While the 223(f) program is not intended for substantial rehabilitation, loan funds may be used for repairs of up to $6,500/unit (more in high-cost areas), or 15% of the property value, or 20% of the mortgage. If the second or third calculation is used, repairs are limited to $15,000/unit (more in high-cost areas). No more than half of any essential structural component (e.g. roofing, HVAC) may be replaced.
In addition, properties being acquired or refinanced with a HUD 223(f) loan must:
- Be at least three years old (for new properties), or have had the last substantial renovation three years ago or more (for renovated properties)
- Owner/developer must place funds monthly in a replacement reserve account
- Must meet additional HUD requirements and items for consideration
What are the terms and conditions of HUD 223(f) loans?
The terms of HUD 223(f) loans are as follows:
Loan amount $1 million, no set maximum Terms Between 10 and 35 years Leverage Up to 85% LTV for market-rate properties, 87% LTV for affordable properties, 90% LTV for properties using rental assistance. Interest rates Fixed for the life of the loan. Includes a mortgage insurance premium, or MIP. DSCR requirements 1.18x for market-rate properties, 1.15x for affordable properties, and 1.11x for rental assistance properties. In addition, properties being acquired or refinanced with a HUD 223(f) loan must:
- Be at least three years old (for new properties), or have had the last substantial renovation three years ago or more (for renovated properties)
- Owner/developer must place funds monthly in a replacement reserve account
- Must meet HUD's minimum property standards
How do I apply for a HUD 223(f) loan?
To apply for a HUD 223(f) loan, you can fill out the form on HUD's website. Eligible borrowers for HUD 223(f) loans must be a single asset, special purpose entity (SPE), which can either be a for profit or a non-profit entity. For more information on eligible borrowers, please visit HUD's website. If a HUD 223(f) loan isn't right for your multifamily development or substantial rehabilitation project, visit Multifamily Loans for more options that include bank financing, life company financing, Fannie Mae, Freddie Mac, and many others.
What are the benefits of refinancing with a HUD 223(f) loan?
HUD 223(f) loans offer many benefits for refinancing, including:
- Non-recourse
- High leverage
- Low interest rates
- Lenient DSCR requirements
- Streamlined processing; loans can close in as few as 60 days
- Less paperwork and fewer reports required
- Loans are fully assumable (with FHA/HUD approval)
However, there are some disadvantages to consider, such as the loan requiring one third-party report, a project capital needs assessment (PCNA), and an FHA application fee of 0.30% of the loan amount. Additionally, borrowers must pay both an initial, one-time MIP (mortgage insurance premium) fee and pay additional MIP each month. Learn more about HUD 223(f) loans here.
What Are the Drawbacks of HUD 223(f) Loans?
While HUD 223(f) loans have a variety of benefits, they also have certain drawbacks, which potential borrowers should be aware of. For example, HUD 223(f) loans typically take a minimum of four months to close, and can often take up to six months if any complexities arise during the closing process. This is about 60 days longer to close than the average Freddie Mac multifamily loan or Fannie Mae DUS multifamily mortgage, and about 45 days longer than CMBS loans, which can often close in as little as 3 months.
How Do HUD 223(f) Loans Compare to Other Types of Multifamily Financing?
While extended closing times can be an issue for certain borrowers, it’s important to understand that the HUD 223(f) program offers longer terms and longer amortization at a lower interest rate than CMBS loans, Fannie Mae, Freddie Mac, and life company multifamily loans.
For instance, Freddie Mac Fixed-Rate Conventional Loans, which start at $5 million, only offer up to 30-year fixed-rate loan terms, while Freddie Mac Small Balance Loans, which start at $750,000, only offer up to 10-year fixed-rate loan terms and up to 20-year adjustable-rate terms. Both loans offer a maximum of 80% LTV, noticeably less than HUD 223(f) loans.
Fannie Mae DUS loans, which start at $3 million, are somewhat similar to Freddie Mac, in the sense that they offer up to 30-year loans with up to 30-year amortizations, with LTVs up to 80%. Fannie Mae Small Loans, which start at $750,000, offer the same. While many Freddie Mac and Fannie Mae loans do offer fully amortizing options, this doesn’t always mean that a borrower will be approved for it.
CMBS loans rarely have fixed-rate loan terms of over 10 years, with 15 years usually being the maximum (and only done in special situations). This means that a property sale or refinancing will typically always be required at the end of the loan term, which can be expensive and inconvenient for investors who wish to hold onto a property for more than 10 years. Of course, CMBS financing is generally much easier to get approved for than HUD/FHA multifamily loans (or Fannie Mae/Freddie Mac loans), as it generally focuses on the financial strength of the real estate asset itself and less on borrower history and financials.
To learn more about HUD multifamily loans, simply fill out the form below and a HUD lending expert will get in touch.