Are HUD 223(f) Loans Non-Recourse?
If you're an investor looking to purchase or refinance a multifamily property, it's essential to understand the status of a loan's recourse provision before making any important financial decisions. If a loan is full-recourse, it means that if a borrower fails to pay back the loan, the le
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Recourse and Non-Recourse Loans in Relation to HUD 223(f) Financing
If you're an investor looking to purchase or refinance a multifamily property, it's essential to understand the status of a loan's recourse provision before making any important financial decisions. If a loan is full-recourse, it means that if a borrower fails to pay back the loan, the lender can go after a borrower's personal assets in order to compensate for their losses. In comparison, non-recourse loans, like the HUD 223(f) loan, only permit the lender to repossess the property itself in the case of a borrower default.
HUD 223(f) Loans and "Bad Boy" Carve outs
While HUD 223(f) loans are non-recourse, they do have a standard exception for "bad boy" carve outs. This means that if a borrower commits certain bad acts, such as providing a lender with fraudulent tax returns or other financial statements, and then defaults on the loan, the loan becomes full-recourse. This permits the lender to seek personal liability against the borrower in order to get their money back. In addition to simple fraud, other examples of "bad boy" activities include waste, bankruptcy, misappropriation, attempting to get subordinate financing behind the lender's back, and violating a loan's special purpose entity (SPE) provisions.
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Related Questions
What is a HUD 223(f) loan?
A HUD 223(f) loan is a loan specifically designed to finance the acquisition or refinancing of existing multifamily properties. Loan terms are typically far more favorable than conventional loans, with fully amortizing terms of up to 35 years. The HUD 223(f) loan program also allows for more flexible underwriting guidelines and lower mortgage insurance premium than other government-insured loan programs. These loans can be used for both market-rate and affordable housing properties, making it a great option for a wide range of investors.
For more information, please visit https://www.multifamily.loans/hud-223f-loans/ and https://www.hud223f.loans/.
You can also download our easy-to-understand HUD 223(f) loan term sheet here.
What are the benefits of a HUD 223(f) 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 223(f) loan?
HUD 223(f) loans have terms including:
- 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)
- Leverage:
- 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
- DSCR:
- 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
Are HUD 223(f) loans non-recourse?
Yes, HUD 223(f) loans are non-recourse loans. However, they do have a standard exception for "bad boy" carve outs. This means that if a borrower commits certain bad acts, such as providing a lender with fraudulent tax returns or other financial statements, and then defaults on the loan, the loan becomes full-recourse. This permits the lender to seek personal liability against the borrower in order to get their money back. In addition to simple fraud, other examples of "bad boy" activities include waste, bankruptcy, misappropriation, attempting to get subordinate financing behind the lender's back, and violating a loan's special purpose entity (SPE) provisions.
For more information, please visit www.hud223f.loans/hud-223f-faqs/non-recourse-loans and www.hud223f.loans/glossary/non-recourse-loans.
What are the advantages of a non-recourse HUD 223(f) 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 main advantages of a non-recourse HUD 223(f) loan are that it limits risks for developers, has low, fixed interest rates, and is fully assumable (with FHA/HUD approval).