Do HUD 223(f) Loans Allow for Supplemental Financing?
If you already have a HUD 223(f) loan , but want to make additional upgrades to your property, a HUD 241(a) supplemental loan could be the perfect way to do it. HUD 241(a) loans can allow 223(f) loan borrowers to make energy efficient improvements, purchase necessary safety equipment, or even to
HUD 223(f) Borrowers Can Get Supplemental Financing Through the HUD 241(a) Program
If you already have a HUD 223(f) loan, but want to make additional upgrades to your property, a HUD 241(a) supplemental loan could be the perfect way to do it. HUD 241(a) loans can allow 223(f) loan borrowers to make energy efficient improvements, purchase necessary safety equipment, or even expand current structures on their property.
What are the Terms for HUD 241(a) Loans?
HUD 241(a) loans have terms including:
Loan Term: HUD 241(a) loans must typically be coterminous with the original HUD 223(f) loan, if there are less than 25 years left on the current loan, or, if borrower gets a HUD waiver, the term may be extended to 40 years.
Loan Size: The lesser of:
90% of the property’s maximum insurable amount, as determined by HUD
90% of the property’s net operating income (factoring in their original HUD 223(f) loan payments)
Minimum DSCR: 1.11x
Are fully non-recourse
Are fully assumable (with FHA approval)
Have fixed interest rates
Require an annual MIP of 0.95%, which may be reduced to 0.25% to 0.35% with Green MIP Reduction
What are the requirements for HUD 223(f) loans?
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
What types of properties are eligible for HUD 223(f) loans?
HUD 223(f) loans permit nearly all property types, as long as they have 5+ residential units, complete kitchens and bathrooms for each unit, and all construction and major rehabilitation is finished three or more years before beginning the HUD loan application process. Eligible properties include row, walkup, detached, semi-detached, or elevator-type rental or cooperative housing, student housing, market-rate, affordable properties, and rental assisted/subsidized (i.e. Section 8, Section 202). HUD 223(f) loans do not permit assisted living, skilled nursing, or memory care properties, though independent living facilities for seniors are allowed. Source
What is the maximum loan amount for HUD 223(f) loans?
The maximum loan amount for HUD 223(f) loans is technically unlimited, however, loans above a certain size may have stricter requirements. For example, for HUD 223(f) loans above $75 million, requirements include:
- Affordable and Subsidized Properties: Maximum LTV of 80% and a minimum DSCR of 1.25x
- Market-Rate Properties: Maximum LTV of 75% and a minimum DSCR of 1.30x
Plus, if a loan is more than $100 million, HUD may decide to impose even more restrictive LTV and DSCR requirements in order to reduce their risk. Regardless, 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).
Are HUD 223(f) loans assumable?
Yes, HUD 223(f) loans are assumable with lender approval and a 0.05% fee. To approve the loan for assumption, the FHA examines the new borrower's financial credentials to ensure that they have the financial strength to pay back the loan. To do so, they perform due diligence, which is why they charge a small fee of 0.05% of the original loan amount in order for the loan to be assumed by the new borrower.
Assumability is the ability to transfer an outstanding mortgage and its terms from the current owner to a buyer, thus allowing the new buyer to acquire the property without obtaining a new mortgage.
Does HUD 223(f) allow for supplemental financing?
Yes, HUD 223(f) borrowers can get supplemental financing through the HUD 241(a) program. HUD 241(a) loans are fully non-recourse, fully assumable (with FHA approval), have fixed interest rates, and require an annual MIP of 0.95%, which may be reduced to 0.25% to 0.35% with Green MIP Reduction.
In addition, HUD 232/241(a) loans provide supplemental financing for HUD-insured healthcare facilities.
What are the Other Conditions of HUD 241(a) Financing?
In addition to the information mentioned above, HUD 241(a) loans: