What are the Pros and Cons of HUD 223f Loans?
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:
85% - market-rate properties (the maximum for these type of properties)
87% - affordable housing
90% - project-based rental assistance properties (i.e. Section 8, Section 202)
Debt service coverage ratio (DSCR) set at generous minimums of:
1.18x - market-rate properties
1.15x - 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.
Disadvantages of HUD 223f Loans
HUD is a government agency, which translates into more time to process loans, usually 100 to 120 days, but sometimes 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