Minimum Loan Amount for HUD 223(f)
By Terry Painter/Mortgage Banker, Author of The Encyclopedia of Commercial Real Estate Advice – Wiley Publishers, Member of the By Terry Painter/Mortgage Forbes Business Council
The Minimum Loan Amount for the HUD 223(f)
The minimum loan amount for HUD 223(f) averages around $3,000,000 – although HUD does not specify an exact minimum loan. HUD allows their approved lenders to decide this. Due to the over 400 hours that it takes a HUD lender to process, underwrite, apply for and close the 223(f), minimum loan amounts under $3,000,000 are not profitable. HUD does set minimum loan amounts based on LTV, rate, and amortization.
When I first started making HUD 223(f) loans back in 1999, they started at about $1 million, and some lenders would go as low as $750,000. Over the years, this minimum amount has increased dramatically due to property values going up along with rents. Today at Apartment Loan Store, our average 223f loan is around $7 million. Click on this link to learn more about the HUD 223(f) Loan, and this link to learn just about everything you might need to know about HUD Multifamily Loans. If you need a smaller apartment building loan, Fannie Mae Multifamily Loans and Freddie Mac Multifamily Loans start at $1 million.
Maximum Loan Amount for HUD 223(f)
Just as HUD does not specify a minimum loan amount for the 223(f), they do not specify a maximum loan amount. So there is no actual limit on the size of a HUD 223(f) loan. However, the borrower’s current multifamily ownership experience can limit the maximum loan amount. This is because HUD prefers applicants to apply for a loan on a similar size property to what they already own. To get around this, if you do not have the experience consider bringing on a partner who does.
For those seeking very large loans, HUD does have much more stringent guidelines for loan amounts over $75 million. But there really is no maximum loan size.
Why Loan Amounts Under $3,000,000 are Not Practical on HUD 223(f)
As mentioned, loan amounts under $3 million are not profitable for HUD lenders whose earnings come from the loan fee and a small loan servicing fee. But lower loan amounts are not practical for the borrower either. This is because high loan expenses for the 223(f). When we add up all the loan costs: 1% origination fee to the lender, a 1% fee to start the mortgage insurance, and legal fees as well as the cost of the Appraisal, Environmental Report, and Property Condition Report, you are likely looking at over $50,000 which just doesn’t pencil for smaller loans. Because these expenses can be financed at a lower rate, longer amortization loan they are financially practical on loans over $3 million.
HUD 223(f) Loan Amount Determining Factors
Like all commercial loans, the HUD 223(f) loan sizes are constrained by the property’s current appraisal, net operating income, LTV, Debt Service Coverage Ratio (DSCR), interest rate and amortization. HUD 223(f) Loan Rates are most often lower than Multifamily Loan Rates on other long term fixed rate loan programs. With the 223(f) having the lowest DSCR, interest rate, and longest amortization, it is a powerhouse for bringing in a larger apartment building loan than the competition. Feel free to compare today’s Fannie Mae Multifamily Loan Rates and today’s Freddie Mac Multifamily Loan Rates which are the HUD 223 (f)’s biggest competitors.
The appraisal, along with a Property Condition Needs Assessment (PCNA) report is a large factor in determining loan amount for the 223(f). The appraiser will offer an opinion of the useful remaining life of the property in years. The loan term and amortization will then be constrained by 75% of this remaining life. For older properties in fair condition this can result in a 25-to-30-year amortization which will lower the loan amount and raise payments. Check this link out for more HUD Multifamily Loan Requirements.
The property condition report will specify the cost of bringing all the major systems of the property into good condition. For older apartment buildings, this can be expensive. HUD will mandate that these improvements be made. The good news is that the cost of the renovations can be financed with the loan – thus increasing the loan size. Of course, the final loan amount will be constrained by the property’s net operating income. Click on these links for the Advantages of HUD Multifamily Loans, and Disadvantages of HUD Multifamily Loans.
And here’s a HUD Multifamily Loan Glossary with 74 terms defined for a fast look up.