Lockouts in Relation to HUD 223f Financing

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.


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