FHA 223(f) Terms, Qualification & Guidelines
Below are the basic guidelines for FHA 223f mortgages:
Multifamily properties with at least 5 units including various classifications (market-rate, subsidized multifamily, low-to-moderate income, affordable housing properties, and cooperative housing) and various types (detached, semi-detached, walkup, row, and elevator-type).
Commercial Space Limitation
HUD multifamily loans limit commercial space to the lesser of:
20% of the property’s effective gross income OR
25% of the property’s net rentable area
Leverage (Loan Amount or DSCR*)
HUD multifamily loans provide the following leverage. The loan amount is subject to the lesser of:
85% LTV for Market Rate Properties
87% LTV for Affordable Housing Properties
90% LTV or the total debt that can be serviced by 90% of net operating income or more for Rental Assistance Properties
For purchases: 100% of mortgageable transaction costs, excluding grants, public loans, and tax credits
The greater value between 80% LTV or 100% of the total cost of refinancing the existing debt and other mortgageable transaction costs
HUD guidelines require minimum replacement reserves of $250 per unit, per year. In addition, HUD requires an initial deposit at closing. This can be funded by mortgage proceeds.
With HUD multifamily financing, insurance and taxes are escrowed monthly.
MIP (Mortgage Insurance Premium)
Paid annually, the HUD-required MIP is included in the interest rates listed above (between 4.10% and 4.75%). HUD requires 1% of the total loan amount at closing as the first year’s MIP. For each year after, it is 0.60% annually. HUD allows an adjustment for affordable properties to 0.45%. Properties qualifying for a Green MIP Reduction are charged a reduced MIP of 0.25%.
Term & Amortization
For up to 35 years, terms are fixed and fully amortizing. The terms cannot exceed 75% of the property’s remaining economic life.
Throughout the life of the loan, interest rates are fixed. The specific interest rate is determined by current rates and prevailing market conditions. In November 2017, rates ranged from 3.10% to 4.10% on HUD 223(f)-insured loans. These rates do not include MIP.
HUD multifamily loans are non-recourse and subject to standard carve-outs.
Based on FHA approval along with a 0.05% fee of the original FHA loan amount, these loans are fully assumable.
There are no prepayment penalties if an FHA multifamily loan is assumed. Also, after 10 years, there are no prepayment penalties. However, there is usually a zero or one year lockout and a 10% to 1% declining prepayment penalty. Additional prepayment options are available.
Prior to application for HUD 223f loans, properties must have an average occupancy of 85% for the preceding six months. This occupancy rate must be maintained throughout the application process. For market rate properties, the maximum underwritten occupancy is 93%. For affordable properties this occupancy is 95%, and for rental assistance properties, it is 97%.
Repairs and Improvements
Some repairs, maintenance, and improvements can be included in the loan (subject to leverage and DSCR limitations) for the greater of:
15% of the property value OR
$6,500 per unit (adjusted for high-cost areas) OR
20% of the mortgage proceeds can be included in the loan amount
However, these repairs cannot exceed $15,000 per unit (also adjusted for high-cost areas), and cannot replace more than 50% of a major building system (i.e. plumbing, electrical, building structure.)
FHA 223(f) loans applications can be submitted by both MAP and non-MAP lenders.
MAP Lenders vs Non-MAP Lenders
According to HUD, MAP (Multifamily Accelerated Processing) is designed to establish national standards for approved lenders to prepare, process and submit loan applications for Federal Housing Administration (FHA) multifamily mortgage insurance.
Non-MAP Lenders - These applications must be processed by a HUD field office under Traditional Application Processing (TAP) which has two stages:
The conditional commitment stage during which the sponsor has a pre-application conference to determine the property’s appraised value and mortgage amount.
The firm commitment stage during which HUD determines the amount of the mortgage and issues a commitment to the lender.
For additional details on MAP, see HUD’s Guide to Multifamily Accelerated Processing.
In general, FHA 223(f) loans take between 100 and 150 days (4 to 5 months) to close. The actual time frame depends on specifics of each deal.
Synopsis Of Fees and Costs
Application fee - usually $25,000; covers due diligence and third-party reports like:
FHA application fee - 0.30% of the total loan amount
FHA inspection fee:
$30 per unit where repairs total over $100,000, but $3,000 or less per unit
If required repairs are greater than $3,000 per unit, the fee is the greater of:
$30 per unit OR
1% of the cost of repairs
Finance and permanent placement fees - usually capped at 3.50% of the total loan amount. Paid from the mortgage proceeds.
Good-faith deposit (commitment and rate lock) - 1% of the total loan amount. Paid at commitment and refunded at closing.
Standard borrower closing costs - lender's legal fees, title fees, and other fees
Additional Hud Requirements and Items For Consideration
Loans greater than $75 million are subject to stricter DSCR constraints and more conservative leverage
HUD 223(f) multifamily financing can be used with LIHTCs (Low-Income Housing Tax Credits)
A PCNA (Project Capital Needs Assessment) must be completed every 10 years
Davis-Bacon prevailing wage rules are not applicable to repairs
The preceding is a thorough synopsis of the HUD 223(f) program. Throughout the remainder of this guide, you’ll find more extensive details on HUD 223(f) multifamily loans. To learn even more about the basics of submitting a file for consideration, visit the Apply Page of our website.