Do HUD 223(f) Loans Have Prepayment Penalties? 

HUD 223(f) Loans and Prepayment Penalties

Like many types of multifamily financing, HUD 223(f) loans typically have prepayment penalties. These are fees that are charged to the borrower if they attempt to pay off the loan early. HUD 223(f) prepayment penalties are negotiable and can vary by lender. They often include a 0-2 year lockout, followed by a 8-10% to 1% declining prepayment penalty. This means that during the first 0-2 years of the loan, the borrower will be unable to prepay it at all. But, after that period, they can prepay it with a penalty starting at 8-10% of the entire loan amount in the first, year, declining by 1% each year until it reaches 0%, typically around the 10th year. 

For example, if a borrower tried to pay back a loan with a 1-year lockout and a 8-1% declining prepayment penalty in the fourth year of the loan, they would most likely be paying a 6% prepayment penalty. 

Why do Prepayment Penalties Exist? 

When a lender issues a loan, they expect to get a specific amount of interest revenue over a specific amount of time. So, if a borrower wants to pay the loan back sooner than expected, it could put the lender in a tough spot. Prepayment penalties compensate the lender for their lost revenue, and usually become less severe as time goes on.

If a HUD 223(f) Loan is Assumed, Does the Original Borrower Have to Pay a Prepayment Penalty?

No. If a HUD 223(f) loan is assumed by a new borrower, the prepayment penalty is waived. This is because the lender can still count on the interest revenue from the new borrower, so they won't be experiencing any financial losses. 


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