What are the Pros and Cons of HUD 223f Loans?
HUD 223f loans have a variety of advantages and disadvantages for investors and developers. While they allow great amount of leverage, have low interest rates, and are non-recourse, they can also require somewhat lengthy wait times and a significant amount of documentation. In this easy-to-read FAQ
Pros and Cons of HUD 223(f) Financing
HUD 223(f) loans have a variety of advantages and disadvantages for investors and developers. While they allow great amount of leverage, have low interest rates, and are non-recourse, they can also require somewhat lengthy wait times and a significant amount of documentation. In this post, we'll review more of the benefits and drawbacks of HUD 223(f) loans.
Advantages of HUD 223f Loans
Borrowers are allowed some of the highest LTV (loan-to-value) ratios available:
87% - market-rate properties (the maximum for these type of properties)
90% - affordable housing
90% - project-based rental assistance properties (i.e. Section 8, Section 202)
Debt service coverage ratio (DSCR) set at generous minimums of:
1.15x - market-rate properties
1.11x - affordable housing
1.11x - rental assistance or subsidized housing properties
Low, fixed-rate loans based on GNMA securities for up to 35 years. These low rates eliminate the risk of refinancing at a higher interest rate. Plus, borrowers won’t have to fear hefty balloon payments.
Longer amortization periods (35 years versus 30 years) offer lower monthly payments than other loans, freeing up more capital for property owners.
Loans are non-recourse and fully assumable.
No geographic restrictions - These loans are available for multifamily properties in all 50 states in the U.S. and several U.S. territories.
Funds are available for repairs and improvements.
Supplemental financing is available.
No financial capacity requirements.
No population requirements.
HUD is a government agency, which translates into more time to process loans, generally at least six months (but frequently much longer).
A borrower's rate won't be locked until HUD gives a commitment. This may take 3-4 months, which can lead to some uncertainty.
There is a need to pay both initial and annual MIP (Mortgage Insurance Premiums).
Additional HUD requirements include:
HUD property inspections
Annual audits (these often cost around $2,500)
Replacement reserve escrows (in addition to regular tax and insurance escrows)
Restrictions include:
Cash out restrictions (including certain restrictions on cash out refinances)
Owner distribution restrictions (these are limited to 2x a year, once after the annual audit, and one time after a certification is signed by the borrower)
HUD and FHA fees which increase the loan’s overall cost:
FHA inspection fees
Third-party reports
Title and recording fees
Financing fees
Legal fees
What are the benefits of HUD 223(f) loans?
HUD 223(f) loans offer some of the best terms in the industry for the acquisition and refinancing of multifamily and apartment properties. These loans are non-recourse, offer high leverage, low interest rates, and lenient DSCR requirements.
The terms of HUD 223(f) loans are as follows:
Loan amount Terms Leverage Interest rates DSCR requirements $1 million, no set maximum Between 10 and 35 years Up to 85% LTV for market-rate properties, 87% LTV for affordable properties, 90% LTV for properties using rental assistance. Fixed for the life of the loan. Includes a mortgage insurance premium, or MIP. 1.18x for market-rate properties, 1.15x for affordable properties, and 1.11x for rental assistance properties. In addition, HUD 232/223(f) loans offer the following advantages:
- Low, fixed interest rates
- Loans are fully assumable (with FHA/HUD approval)
- HUD 232/223(f) loans are non-recourse, limiting risks for developers
What are the drawbacks of HUD 223(f) loans?
The drawbacks of HUD 223(f) loans include:
- Somewhat longer closing times than comparable loans (i.e. Freddie Mac® or Fannie Mae® multifamily loans)
- Can require a lot of documentation, including appraisals, market studies, and environmental reports
- Requires the payment of a mortgage insurance premium (MIP), as a one-time fee at closing and on a monthly basis
- Like most other HUD multifamily loans, HUD 223(f) loans require replacement reserves and annual operational audits
- Owner distributions are limited to 2x a year
What are the eligibility requirements for HUD 223(f) loans?
Eligible Borrowers for HUD 223(f) Loans: If you're an investor or developer who wants to use a HUD 223(f) loan to acquire or refinance a multifamily property, you'll need to make sure you that your borrowing entity has the correct legal structure. In general, HUD 223(f) loans require that the borrower is a single asset, special purpose entity (SPE), which can either be a for profit or a non-profit entity.
Eligible Properties for HUD 223(f) Loans: HUD 223(f) Loans Permit Nearly All Property Types. In general, to be eligible for HUD 223(f) financing, a property:
- Must have 5+ residential units
- Must have complete kitchens and bathrooms for each unit
- Can be row, walkup, detached, semi-detached, or elevator-type rental or cooperative housing
- Can be student housing, but multiple rents cannot be derived from one unit and rents need to be similar to comparable multifamily properties
- Can be market-rate, affordable, or rental assisted/subsidized (i.e. Section 8, Section 202)
- Cannot be an assisted living, skilled nursing, or memory care property (though independent living facilities for seniors are allowed)
- Must have all construction and major rehabilitation finished three or more years before beginning the HUD loan application process
Additional Hud Requirements and Items For Consideration:
- Loans greater than $75 million are subject to stricter DSCR constraints and more conservative leverage
- HUD 223(f) multifamily financing can be used with LIHTCs (Low-Income Housing Tax Credits)
- HUD 223(f) loans can be used for refinancing or purchasing Section 202, Section 236, and Section 8 funded properties
- A PCNA (Project Capital Needs Assessment) must be completed every 10 years
- Davis-Bacon prevailing wage rules are not applicable to repairs
To learn even more about the basics of submitting a file for consideration, visit the Apply Page of our website.
What types of properties are eligible for HUD 223(f) loans?
Eligible Properties for HUD 223(f) Loans: HUD 223(f) Loans Permit Nearly All Property Types
In general, to be eligible for HUD 223(f) financing, a property:
- Must have 5+ residential units
- Must have complete kitchens and bathrooms for each unit
- Can be row, walkup, detached, semi-detached, or elevator-type rental or cooperative housing
- Can be student housing, but multiple rents cannot be derived from one unit and rents need to be similar to comparable multifamily properties
- Can be market-rate, affordable, or rental assisted/subsidized (i.e. Section 8, Section 202)
- Cannot be an assisted living, skilled nursing, or memory care property (though independent living facilities for seniors are allowed)
- Must have all construction and major rehabilitation finished three or more years before beginning the HUD loan application process
What is the maximum loan amount for HUD 223(f) loans?
The maximum loan amount for HUD 223(f) loans is technically unlimited, however, loans above a certain size may have stricter requirements. For example, for HUD 223(f) loans above $75 million, requirements include:
- Affordable and Subsidized Properties: Maximum LTV of 80% and a minimum DSCR of 1.25x
- Market-Rate Properties: Maximum LTV of 75% and a minimum DSCR of 1.30x
Plus, if a loan is more than $100 million, HUD may decide to impose even more restrictive LTV and DSCR requirements in order to reduce their risk. Regardless, the overall size of a HUD 223(f) loan cannot go beyond a specific per-unit limit set by HUD (and adjusted by project location).