Prepayment and the HUD 223(f) Loan Program
Prepayment occurs when a borrower pays off a loan balance before maturity (the end of the loan term). If a borrower does this, they will often be prepayment penalty of a certain percentage of the loan amount. In the case of HUD 223(f) loans, there is usually a 0-2 year lockout period, in which borrowers cannot repay the loan at all. After that, borrowers will typically face a 8-10% to 1% declining prepayment penalty. This means that the prepayment penalty will decline by 1% a year for 8-10 years from a high of 8-10%, until it disappears completely.