- 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
- 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
- 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.
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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