HUD/FHA 223(F) Multifamily Loans

HUD/FHA 223(f) multifamily loans offer government-backed financing for qualifying multifamily properties. The FHA-insured loans have long terms and fixed interest rates, making them an attractive option for primary financing. Both non-profit organizations and for-profit businesses may use the loans to acquire or renovate a qualifying multifamily property.

223(f) HUD financing may be a good long-term financing option for any qualifying commercial property, but properties must meet stringent criteria to qualify. The more prominent criteria are that a property must have at least 5 residential units and be a minimum of 3 years old (new construction doesn’t qualify). Major renovations also can’t have been done within the past 3 years, although standard repairs are allowable.

In addition to these criteria, a property must have at least an 85% average occupancy rate for the past 6 months. Commercial leased space can account for no more than 25% of a property’s square footage or 20% of its gross revenues. Multifamily properties, detached structures and row houses all qualify.

Notably, the rents charged aren’t one of the criteria that a building must meet. Although these loans are mostly used for low-income housing projects, properties that charge market rental rates can also be financed via a HUD/FHA 223(f) loan.

When compared to Fannie Mae, Freddie Mac, commercial mortgage-backed securities and many other commercial financing options, 223(f) HUD financing provides access to longer terms and greater leverage.

These loans can last up to 35 years (maximum of 75% of the financed property’s/rennovation’s expected life span), and can have loan-to-value ratios as high as 90%. The exact maximum LTV ratio allowed depends on the rates charged for a property’s units:

• 83.3% LTV is allowed for properties with market rates
• 85% LTV is allowed for properties meeting Affordable Housing requirements
• 87% LTV is allowed for properties with 90%+ rental assistance
• 90% LTV is allowed for Section 202 & 202/8 Direct Loans

The interest rates offered are competitive market rates that aren’t subsidized, but they’re fixed for the entire duration of a loan.

Because of the high leverage that’s allowed, borrowers must pay a mortgage insurance premium on any FHA 223(f) loan. MIP is 1% of a loan’s value for the first year and 0.6% annually thereafter, although affordable-housing properties can get an adjustment down to 0.45% after the first year.

The minimum amount for 223(f) HUD financing is $2 million, so the program isn’t used to finance small or low-cost properties.

HUD/FHA 223(f) loans have many features, but there are four main ones that borrowers should be particularly aware of:

• FHA-Guaranty: The main feature of 223(f) HUD financing is that it comes with a guarantee from the Federal Housing Administration, which is why these loans can offer such high leverage and long terms. Applying for an FHA-guaranteed loan does prolong the application process some, though, because the administration must approve the loan.
• Non-Recourse: These loans are non-recourse for key principles of the organizations and businesses that take them out. Eliminating the need for a personal guarantee can be especially important when financing a low-income or affordable housing project.
• Assumable: These loans are assumable, provided the FHA and lender approve of the new borrower. Assumption can be a particularly critical consideration because these loans have such long terms -- interest rates can fluctuate widely over 35 years, and current rates may be very attractive to a prospective borrower in the future.
• Prepayment Penalty: These loans come with a straightforward prepayment penalty. The penalty is 10% of the loan value if paid off in the first year, and it decreases by 1% annually. There isn’t a prepayment penalty after the 10th year.