When purchasing or refinancing a building with a HUD 223(f) loan, investors and developers often need to decide whether to set rents low enough to have the property legally qualify as affordable housing, or to set rents at the going market rate. Borrowers with market rate properties are permitted a maximum 85% LTV (loan-to-value) ratio under the HUD 223(f) loan program. In comparison, borrowers can qualify loan with an LTV of up to 87% if their property is considered affordable housing. However, Rental Assistance Demonstration (RAD) properties, in which the owner signs a project-based Section 8 contract to limit rents and receive government reimbursement, can qualify for an even higher 90% LTV. Rental assistance and affordable properties also have lower minimum DSCR requirements (1.11x and 1.15x respectively) in comparison to market rate properties, which have a 1.18x minimum DSCR requirement.

The amount of rent per month that constitutes affordable housing can vary significantly based on location. In addition, it is typically based on a percentage of HUD's Area Median Income (AMI) calculation for a specific geographic location. To determine area median income for any specific area in the U.S., you can visit the HUD income limits guide.

Investing in market rate properties with HUD 223(f) loans can provide a variety of benefits for developers and investors. 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:

Market rate properties typically provide more rental income upfront, and HUD 223(f) loans offer some of the best terms in the industry for the acquisition and refinancing of multifamily and apartment properties.

Investing in affordable properties with HUD 223(f) loans offers many benefits. These loans are non-recourse, offer high leverage, low interest rates, and lenient DSCR requirements. Additionally, investors and developers who use a HUD 223(f) loan to acquire or refinance a multifamily property have the choice to make that property affordable. This typically involves providing below-market rents and taking advantage of either the HUD Section 8 program or Low Income Housing Tax Credits (LIHTCs).

The terms of HUD 223(f) loans are as follows:

To be eligible for HUD 223(f) financing, a market rate property must have 5+ residential units, 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, and must have all construction and major rehabilitation finished three or more years before beginning the HUD loan application process.

When it comes to purchasing market-rate properties with a HUD 223(f) loan, borrowers are permitted Loan-to-Value (LTV) ratios of up to 85%, and Debt Service Coverage Ratios (DSCRs) as low as 1.18x.

HUD 223(f) loans offer incredibly generous terms-- including 35-year, fully amortizing, fixed-rate financing, and nearly unbeatable leverage. To be eligible for HUD 223(f) financing, a property must have:

• 5+ residential units
• 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