MIP: Mortgage Insurance Premiums in Relation to HUD 223f Loans
Before being approved for a HUD Multifamily loan, a borrower must have mortgage insurance. HUD-requires borrowers to pay MIP (Mortgage Insurance Premium) on FHA loans. This insurance policy is not to be confused with PIM (private mortgage insurance) which is required on some conventional mortgage lo
HUD 223f Loans and Mortgage Insurance Premiums (MIPs)
Before being approved for HUD Multifamily loans, like the HUD 223(f) loan, a borrower must have mortgage insurance. HUD-requires borrowers to pay MIP (Mortgage Insurance Premium) on FHA loans. This insurance policy is not to be confused with PMI (private mortgage insurance) which is required on some conventional mortgage loans.
How HUD 223(f) Borrowers Pay MIP
MIP is paid both as a one-time cost and as an annual payment:
One-time MIP: 1% of the total loan amount, paid at closing as the first year’s MIP.
Annual MIP: Each following year, the MIP is 0.60% of the loan amount. Affordable properties receive an adjusted rate of 0.45%, while properties with a Green MIP reduction receive discounted rate of 0.25%. Interest rates on these payments range between 4.10% and 4.75% (with MIP included).
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What is the difference between a HUD 223f loan and a conventional loan?
The main difference between a HUD 223(f) loan and a conventional loan is the purpose of the loan itself. HUD 223(f) loans are intended for the acquisition and refinancing of multifamily properties, while conventional loans are designed for single-family homes. HUD 223(f) loans also have a slightly longer term length, at 35 years, when compared to conventional loans, which have a maximum term length of 30 years. In addition, HUD 223(f) loans have slightly higher interest rates than conventional loans, and a higher minimum loan amount, at $2 million, compared to $100,000 for a conventional loan.
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What are the benefits of a HUD 223f loan?
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 requirements for a HUD 223f loan?
The HUD 223(f) loan program has a full checklist of requirements, which can be found here. Generally, the requirements are as follows:
- Loan Amount: Minimum loan amount of $1 million (exceptions can be made on a case by case basis)
- Loan Term: Minimum loan term of 10 years, and a maximum term of 35 years (or 75% of the property's remaining economic life)
- Market rate properties: 83.3% LTV
- Affordable properties: 85% LTV
- Rental assistance properties: 87% LTV, 90% LTV for properties with 90% or more rental assistance
- Interest Rates: Fixed, terms range from 4.10% to 4.75% (including MIP), as of Jan. 2019
- Market rate properties: 1.17x minimum DSCR
- Affordable properties: 1.15x minimum DSCR
- Rental assistance properties: 1.11x minimum DSCR
- MIP: 1% upfront mortgage insurance premium for all property types, then, annual MIP of:
- 0.65% for market rate properties
- 0.45% for affordable properties (typically must be Section 8 or new money LIHTC projects to qualify)
- 0.25% for Energy Star SEDI (Statement of Design Intent) certified properties
- FHA Application Fee: 0.30% of the total loan amount
- Cash Out: For 223f refinances, cash out is allowed under specific conditions. LTV must be at least 80% (including transaction costs in the loan amount). At that point, 50% of funds above 80% adjusted LTV are released, with the remaining 50% to be released after property rehab is complete.
- Repair Limitations: While the 223(f) program is not intended for substantial rehabilitation, loan funds may be used for repairs of up to $6,500/unit (more in high-cost areas), or 15% of the property value, or 20% of the mortgage. If the second or third calculation is used, repairs are limited to $15,000/unit (more in high-cost areas). No more than half of any essential structural component (e.g. roofing, HVAC) may be replaced.
In addition, properties being acquired or refinanced with a HUD 223(f) loan must:
- Be at least three years old (for new properties), or have had the last substantial renovation three years ago or more (for renovated properties)
- Owner/developer must place funds monthly in a replacement reserve account
- Must comply with HUD's environmental review requirements
What is the maximum loan amount for a HUD 223f loan?
HUD 223(f) loans have no maximum loan amount. However, HUD may decide to impose even more restrictive LTV and DSCR requirements for loans above $100 million in order to reduce their risk. 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).
What is the mortgage insurance premium for a HUD 223f loan?
Mortgage insurance premiums (MIPs) are required for HUD 223f loans. The MIP is 0.30% of the entire loan amount, plus an FHA inspection fee of 0.50% of the loan amount (which can be funded with the loan itself).