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FHA/HUD 232/223(a)(7) Loans

Specialized Refinancing By FHA/HUD

  • Sniper housing and assisted living facilities are highly specialized, and thus require specialized financing solutions. The Federal Housing Administration makes financing for the acquisition and/or construction of these properties available through its FHA/HUD 232 and FHA/HUD 223 loan programs.

Advantages of FHA 232/223(a)(7) Loans

223/232(a)(7) HUD refinancing has substantial advantages over other loan programs:

  • Availability: FHA/HUD refinancing makes refinancing senior living and similar properties possible even if non-FHA loans are unavailable.
  • Interest Rates: Property owners can secure lower interest rates when market rates are down.
  • Loan Term: Property owners can extend the term of their financing for up to 12 years.
  • Assumable: Loans can be passed onto a property buyer since they are assumable.

Disadvantages of FHA 232/223(a)(7) Loans

Despite the many advantages of 223/232(a)(7) FHA refinancing, the program has some disadvantages too:

  • Limited Eligibility: Only available for qualifying properties, which are existing multifamily senior living, assisted living or skilled nursing properties.
  • Strict Usage: Doesn't allow for any take-outs when refinancing, and proceeds can't be used for substantial improvements
  • Prepayment Penalty: Has a step-down prepayment penalty that starts at a high 10% in the first year, and lasts for 10 years.

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What Are FHA/HUD 232/223(a)(7) Loans?

The FHA/HUD 223/232 (a)(7) loan program provides refinancing for properties that are already financed through the FHA/HUD 232/233(f) or 223 loan program. Without this specialized program, refinancing senior housing and similar buildings that already have a Department of Housing and Urban Development loan would be difficult.

What Buildings Can Be Refinanced Through the FHA/HUD 223(a)(7) Loan Program?

In order to qualify for a HUD/FHA 223(a)(7) loan, a multifamily property must be first financed through either the HUD/FHA 232/233(f) or HUD/FHA 223 loan program. These programs provide financing for senior housing, assisted living and skilled nursing properties. 

Thus, the FHA/HUD 223(a)(7) loan program provides refinancing for senior housing, assisted living and skilled nursing properties that already have HUD/FHA financing.

The exact criteria that determine whether a property qualifies are set forth in the Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA), and overseen by the Department of Urban Housing Development and its Federal Housing Administration.

What Can HUD/FHA 232/223(a)(7) Loans Be Used For?

The Federal Housing Authority places restrictions on how proceeds received through HUD/FHA 232/223(a)(7) loans can be used. Namely, the loans must be used to refinance a qualifying property. They can't be used for purchase, construction or improvement.

More specifically, activities can't include new construction, expanding the footprint or height of an existing building, or making any repairs that involve ground disturbance. Generally, no improvements are allowed, and especially no improvements that would alter the exterior structure of a building are permitted.

Cash withdrawals and take-outs also aren't allowed when refinancing through the FHA 232/223(a)(7) loan program.

The Department of Housing and Urban Development does expressly allow proceeds to be used for the following expenses:

Payoff of an existing FHA-insured loan

Any costs associated with refinancing an FHA loan

Critical and non-critical repairs per a Capital Needs Assessment

Deposits needed to reserve replacement accounts

What Terms Do HUD/FHA 232/223(a)(7) Loans Come With?

The terms of HUD/FHA 232/223(a)(7) loans largely pattern themselves after the HUD/FHA 232 and HUD/FHA 223 loans that they refinance. 

Most notably, the term of a HUD 232/223(a)(7) loan is calculated based on the HUD 232/223 loan being refinanced. The HUD 223(a)(7) refinancing can be extended for up to 12 years beyond when the original loan would mature. The duration of the HUD 223(a)(7) loan can't exceed the duration of the original HUD 232/223 loan.

Additionally, the duration of any HUD 223(a)(7) loan can't exceed 75% of the refinanced property's useful life.

The interest rates of HUD/FHA 232/223(a)(7) loans are based on current market rates, and these loans frequently come with some of the most competitive rates for senior housing because of the FHA insurance. Like HUD 232/223 loans, the interest rate is usually fixed for the duration of the loan.

What Features Do HUD/FHA 232/223(a)(7) Loans Have?

HUD/FHA 232/223(a)(7) loans have most of the features that are normally standard with FHA loans. Some main features are:

FHA Guaranty: The Federal Housing Administration guarantees these loans, ensuring that lenders will receive the outstanding balance even if the property owner defaults. Refinancing existing senior living, assisted living and skilled nursing facilities can be challenging without such a guarantee.

Non-Recourse: Refinancing is non-recourse for all key principals that have an interest in the senior living property. Because of the cost of assisted living and skilled nursing facilities, few property owners want to offer a personal guaranty even if they're able to (and most aren't able).

Assumable: Like the original financing, the FHA 232/223(a)(7) refinancing can be assumed by other qualified borrowers. Selling a refinanced property is difficult if a buyer can't assume the existing loan.

Prepayment Penalty: The prepayment penalty is usually structured as a step-down penalty, often starting at 10% of the loan amount and decreasing 1% per year. Most of these loans don't have a penalty after year 10.

Can Investors Seek Additional Financing Once a Property is Refinanced Through the HUD 232/223(a)(7) Loan Program?

The HUD 232/223(a)(7) loan program doesn't place any restrictions on what supplemental or secondary funding can be applied for after the refinance is complete. Should investors want to enlarge or improve an existing property with an additional loan, that is usually allowed provided they qualify for the additional loan and it doesn't replace the primary HUD 223(a)(7) loan.

Do FHA 232/223(a)(7) Loans Come With Variable or Fixed Interest Rates?

FHA 232/223(a)(7) loans generally have fixed interest rates that last for the duration of the loan. This can allow investors to secure long-term, low-interest debt if they refinanced for the maximum allowed term (remaining loan duration + 12 years) during a low-interest rate environment.

How Much Does Refinancing Through FHA/HUD 223(a)(7) Cost?

Refinancing costs can vary, as some associated expenses are variable and others are fixed. Investors should be prepared for a HUD application fee of 0.15%, legal and closing fees, an origination fee, and all other normally refinancing expenses. There generally isn't a HUD inspection fee.

Whatever the refinancing costs are for a property, most of them can be covered by the HUD 223(a)(7) loan.

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