HUD 223(f) Loan Lockouts
Like many multifamily loans, HUD 223(f) loans have various prepayment provisions. These include certain prepayment penalties. Since lenders expect to make money from a borrower througout the life of a loan, these penalties and provisions are designed to compensate them for their losses should a borrower attempt to pay off their loan earlier than expected.
One common prepayment provision is called a lockout, which prevents a borrower from repaying a loan at all for a specific period of time. While all prepayment provisions are negotiable for HUD 223(f) loans, lenders will typically insist on a lockout period of between 0 and 2 years.
What are the Average Terms for HUD 223(f) Loan Lockouts?
As we just mentioned, most HUD 223(f) lockouts are between 0 and 2 years, with the majority being 2 years. This lockout period is typically followed by an 8-10% declining prepayment penalty. In many cases, this is structured as step-down (i.e. 10%, 9%, 8%, 7%, 6%, 5%, 4%, 3%, 2%, 1%) with the penalty declining 1% for each year after the lockout period is over.
Instead of paying off the loan early when they want to sell a HUD 223(f) property, many investors and developers decide to find a borrower who will assume their loan. This allows them to avoid any prepayment penalties, and can often result in a faster approval process and reduced closing costs for the new borrower/owner of the property. In addition, the fact that HUD 223(f) loans are assumable can make the property more attractive for buyers, especially in an environment of rising interest rates.