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HUD 223f Loan - Update 2024
The HUD 223(f) Multifamily Loan has distinct advantages compared to any other commercial loan on the market. But the parameters are a bit complex.
MINIMUM LOAN SIZE is typically +- $5 million
ADVANTAGES:
High Loan-to-Value Ratios
Borrowers are allowed some of the highest LTV (loan-to-value) ratios available:
83% - market-rate properties
85% - affordable housing
87% - 90% or more of tenants receiving rental assistance
90% - rental assistance or subsidized (Section 8, etc.)
Low Debt Service Coverage Ratio
The DSCR requirements are set fairly low, allowing borrowers to obtain higher loan amounts:
1.18x - market-rate
1.15x - affordable housing
1.11x - rental assistance or subsidized
Low Fixed Interest Rate
The interest rate offered by HUD is typically lower than the rates offered by any other agency or conventional lender, and the rate is fixed for the entire term of the loan. These low rates enable borrowers to lower their payments and increase net cash flow,
Extended Term & Amortization
The standard fixed-rate term and amortization on the HUD loan is 35 years, compared to the industry-standard 25 or 30 years. Amortizing the payments over 35 years lowers the monthly payments, and the longer term eliminates the risk of having to refinance at a higher interest rate.
Loans are Non-Recourse
#HUDloans are non-recourse, so the loan does not require a personal guarantee and it is not considered a contingent liability. Although this non-recourse provision still maintains standard carve-outs for fraud, theft of funds, and unapproved transfer.
Fully Assumable
Should the borrower choose to sell the property, the new buyer can assume the existing loan, which can be a competitive advantage, especially if interest rates rise while the HUD loan is fixed for 35 years at a lower rate.
No Geographic Restrictions
These loans are available for multifamily properties in all 50 states in the U.S. and several U.S. territories, regardless of the size of the market. Many other competing loan programs will restrict the availability of their loan products to certain markets or increase the rate for smaller markets.
Additional Funds
Borrowers may get cash-out from the HUD loan repairs and improvements to address any necessary capital projects or deferred maintenance.
Prepayment Penalty
The 223(f) typically has a 10-year step-down prepayment penalty schedule rather than a yield-maintenance penalty, which makes it very predictable and less risky to the borrower in the event they decide to pay the loan off early. Typically, prepayment penalty consists lockout (no payoff allowed) for the first 2 years, then declining from 8% to 1% each year for the next 8 years.
Supplemental Financing
If borrower who already has a HUD 223(f) loan wants to make additional upgrades to the property in the future, they can obtain a HUD 241(a) supplemental loan. These supplemental loans enable the borrower to make energy efficient improvements, purchase safety equipment, or even expand current structures on the property in the future.
DISADVANTAGES
Documentation Requirements
As with most government agency loans, the documentation requirement is intensive, which can be frustrating to some borrowers, but a good lender will assist with compiling and submitting the documentation.
Timing
HUD is a government agency, which translates into more time to process loans, usually 100 to 120 days or longer, and the borrower's rate cannot be locked until HUD gives a firm loan commitment. This may take 3-4 months after the borrower submits all of the required documents for full application, making the entire process take 8-9 months or longer.
[00:00:13] Higher LTV
[00:00:35] Lower DSCR
[00:01:00] Lower Interest Rate
[00:01:18] Longer Amortization
[00:01:38] Lower Monthly Payments
[00:01:47] Non-Recourse
[00:01:56] Fully Assumable By a Buyerw
[00:02:31] No Geographic Restrictions
[00:02:40] No Population Requirements
[00:02:55] Cash-Out Allowed
[00:03:12] Predictable Prepayment Penalty
[00:03:33] Supplemental Financing is Allowed
[00:04:02] Disadvantages of HUD 223(f) Loans
[00:04:10] Documentation Requirements
[00:04:46] Longer Timeframe to Close the Loan
[00:05:11] Higher Origination Fees & Ongoing Costs
[00:05:57] Mortgage Insurance is Required
[00:06:05] Annual Inspections
[00:06:21] ... Maybe
[00:06:39] Audited Financials are Required
[00:07:26] Be Prepared to Set Aside Replacement Reserves
[00:08:12] Cash-Out Restrictions
[00:08:38] Which Loan is Best for You?
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