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HUD/FHA 223(F) MULTIFAMILY LOAN

FHA/HUD Multifamily Financing

  • The FHA 223(f) loan program has primarily been used by non-profit organizations to finance low-income and affordable housing projects, and this use has admittedly given the loan program a certain reputation.
  • For-profit businesses that don’t consider this program simply because of a stigma, however, could be missing out on one of the longest-term and highest-leverage financing options. 223(f) HUD financing should be considered whenever a property qualifies.

FHA 223(f) Commercial Loan Highlights


Eligible Properties: Existing multifamily properties that are at least three years old. Market rate, low to moderate-income, and subsidized multifamily projects

Loan amount range: Minimum $2,000,000 with exceptions made on a case-by-case basis

Interest Rate: Fixed rates vary. Floating Rates from 2.30% over LIBOR. See current LIBOR rates.  

Loan Term: Up to 35 years

Amortization: Not exceeding 75% of the remaining economic life.

Maximum LTV: 83.3% for market rate; 85% for Affordable Housing; 87% LTV is allowed for properties with 90%+ rental assistance; 90% LTV is allowed for Section 202 & 202/8 Direct Loans

Minimum DSCR: 1.176x for market-rate; 1.11x for properties having at least 90% rental assistance contracts

Recourse: Non-recourse, subject to HUD Regulatory Agreement.

Prepayment: Typical 10% year one, declining 1% per year. Depending on Market conditions, other options may be available.

Origination Fee: Negotiable

Good Faith Deposit: 1% of the total loan amount due at commitment and refunded at closing.

HUD Mortgage Insurance: HUD controls the cost of FHA insurance. 1% MIP of the loan amount is due to HUD when closing. Annual MIP Rates vary: 0.60% for Market Rate Properties. 0.35% for Affordable Housing. 0.25% for Rental assistance and energy efficient properties.

HUD Application Fee: 0.30% of entire finance amount due to HUD application submission

HUD Inspection Fee: $30 per unit if repairs are less than $3,000 per unit or 1% of the total cost of required repairs if that exceeds $3,000 per unit. 

Advantages of FHA 223(F) Loans

223(f) HUD financing’s features create significant advantages that make these types of loans attractive for several reasons:

  • FHA 223(f) loans offer longer terms (up to 35 years) than most other commercial loans.
  • FHA 223(f) loans offer higher leverage (up to 83.3-90%) than most other commercial loans.
  • FHA 223(f) loans are non-recourse for all principals of the organizations that use these loans.
  • FHA 223(f) loans can be underwritten for large properties and projects, with the minimum loan amount being $2 million.
  • FHA 223(f) loans have more favorable terms for properties that offer affordable housing.

Disadvantages of FHA 223(F) Loans

Despite its notable advantages, 223(f) HUD financing also has some disadvantages that make it unsuitable for certain properties and projects:

  • FHA 223(f) loans are only available for qualifying properties, which must be existing properties with at least 5 units.
  • FHA 223(f) loans have a prepayment penalty for the first 10 years of their term.
  • FHA 223(f) loans take longer to underwrite because the FHA must approve them. The Traditional Application Process (TAP) usually takes 4 months, although Multifamily Accelerated Processing (MAP) can speed that time frame-up.

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What Are 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.

What Commercial Properties are FHA 223(f) Loans Well-Suited For?

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.

What Terms Do FHA 223(f) Multifamily Loans Offer?

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.

What Features Do FHA 223(f) Loans Come With?

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.

 

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