Apartment Loans

HUD 223(f) Loan for Purchase and Refinance

By Terry Painter/Mortgage Banker, Author of The Encyclopedia of Commercial Real Estate Advice – Wiley Publishers, Member of The Forbes Business Council

 

The HUD 223(f) loan is used for the acquisition, refinance, or minor rehabilitation of multifamily properties of 5 units or more. Multiple single-family homes, duplexes or triplexes are not acceptable. Multiple 4-unit buildings that are contiguous on one or individual tax lots are allowed. Mixed-Use properties can be financed if the commercial space does not occupy more than 25% of the rentable square footage or  account for more than 20% of the gross rents. 

 

HUD 223(f) Loan Requirements and Guidelines

Check out this link for detail on the Minimum Loan Amount for the HUD 223(f), and  this one for HUD Multifamily Loan Requirements.

For Acquisition, Refinance, or Minor Rehabilitation of Multifamily Properties

  • Loan Sizes:  $3,000,000 – $100,000,000 plus
  • LTV: 85% for Market Rents, 87% Affordable Rents, 90% Subsidized Rents
  • Refinance LTV’s:  85% Without Cash-Out, 0% With Cash-Out
  • Loan Modification Allowed to Lower Rate if Rates Come Down
  • Commercial Space: 25% of rentable square footage, 20% of gross income
  • 35-Year Fixed Rate
  • 35-Year Term and Amortization
  • 1.176 DSCR
  • 90% Occupancy Required for 90 Days
  • Non-Recourse
  • No Tax Returns
  • No Debt to Income or Global Ratio for Borrower 
  • Assumable with a .50% fee
  • Loan Fee: 1 – 2%
  • HUD Approval Fee: .30%
  • HUD Exam Fee: .40%
  • Mortgage Insurance Monthly: .25% for Green, .60% for Standard Properties
  • Replacement Reserves Required Monthly for Future Repairs and Replacements
  • Current Multifamily Ownership Experience Required
  • Any size Market Okay
  • Good Credit Required
  • No Minimum Net Worth Requirement
  • Declining Prepayment Penalty 1st 10 years
  • Rate Lock at Loan Approval 
  • 6 Months for Closing.

 

Advantages of HUD 223(f) Multifamily Loans

If you are wondering What is the Highest LTV Multifamily Loan, it’s the HUD 223(f). LTVs on market rent properties can go up to 85% on a purchase or refinance without cash out. 80% on a refinance with cash out.  

 

From my 24 years making HUD Multifamily Loans, I can tell you that if you are planning on keeping your apartment building a long time or maybe even forever – and passing it on to your kids, the HUD 223(f) could be the very best and very last permanent loan you will need to get for the property. Here’s why: For starters, you are going to get a Non-Recourse Loan with the lowest long term fixed rate and the highest leverage of any apartment building loan program in America. We are talking about landing up to an 85% LTV loan fixed for 35 years with a 35-year amortization.

 

Better yet, HUD 223(f) Loan Rates fixed for 35 years are lower than most lender’s 10-year fixed rates. And what’s just about unbelievable, is that if rates come down in the future you can do an interest rate loan modification and get your rate lowered to current rates for a nominal fee. I know of no other commercial loan program that can do that!

 

Did you know that the 223f has the lowest Debt Service Coverage Ratio (DSCR) at 1.176 for market rent apartments. Compare The Difference Between HUD and Fannie Mae requirements and guidelines and you will see that HUD outperforms both and commercial banks to boot! All these other loan programs have a 1.25% DSCR, and when combined with higher rates and shorter amortizations mean they lend less. Go ahead and compare today’s HUD Multifamily Loan Rates with today’s Fannie Mae Multifamily Loan Rates and today’s Freddie Mac Multifamily Loan Rates.  And while you’re at it why not compare Multifamily Loan Rates on some of our most popular apartment loan programs. 

 

Click on this link if you want to view an extensive list of the main Advantages of HUD Multifamily Loans. And this link if you want to read just about everything about HUD Multifamily Loans.

 

And here’s a HUD Multifamily Loan Glossary with 74 terms defined for a fast look up.

 

Disadvantages of HUD 223(f) Multifamily Loans

Click on this link for much more detail on the Disadvantages of HUD Multifamily Loans.   

 

Now that I’ve wowed you with some of the pros of the 223(f), it’s only fair that we go over the cons. Number one is that it’s going to take a good 6 months to close one of these loans. Maybe even longer if HUD is backed up. Now that certainly doesn’t make the 223(f) user friendly for purchases. In fact, we often have to close acquisitions with a temporary bridge loan while waiting for our HUD loan to close which adds on more closing costs.  

 

Another disadvantage is that these loans have higher closing costs than most commercial loans. There is a loan fee to the lender, HUD and an initial fee to start mortgage insurance premium, which is required because of the high leverage of most of these loans and so HUD can guarantee the loan. Then the 223(f) doesn’t work for small loans. Because of all the work and time involved, most lenders want a minimum loan of $3 million if not $5 million. And then if this property is going to be one of your main sources of income, it’s going to be darn right inconvenient to only be able to take owner draws twice a year after an annual audit is inspected by HUD.  

 

Eligible Properties

Check out this link for more detail How Does HUD Define Multifamily

 

The HUD 223(f) requires Multifamily properties to have 5 units or more. Multiple residential buildings of 1 – 3-units on one or individual tax lots that are contiguous are not preferred by HUD. However, multiple 4-unit buildings that are contiguous and on one or individual tax lots are acceptable. Mixed use properties with a maximum of 25% commercial space are acceptable. 

 

HUD requires properties to be in very good condition as their mandate is to not only create more housing in America, but quality ones. So, if the property is over 15 – 20 years old, and has a lot of deferred maintenance, it might be cost prohibitive to bring it up to HUD standards. HUD will allow up to $15,000 per unit in upgrades that can be financed with the loan.

 

HUD requires one of the most extensive property condition reports called a Property Capital Needs Assessment (PCNA), which looks at in detail all the major systems including the structure and roofing, electrical, plumbing, HVAC as well as walkways, and parking lots.  

 

Eligible Borrowers

Borrowers must have current multifamily ownership experience. If the loan request is for an acquisition, the borrower must have ownership experience of a similar size property.  In other words, if the borrower currently owns a 24 unit and wants to purchase a 36 unit, that could likely work for HUD. But if they want to buy a 68 unit, that will not work unless the borrower brings in a partner key principal that has experience owning a property of that number of units.

 

Professional Management

HUD does not encourage self-management but does not mandate that the borrower cannot self-manage. I always recommend that first time HUD 223(f) multifamily borrowers that want to self-manage hire professional management with HUD experience for at least the first year or two until the ropes are learned. Otherwise, it could be a daunting task to figure out the extensive paper work required by HUD as it pertains to the property’s maintenance/repair and financial requirements which tie into the required annual financial audit. 

 

Getting Pre-Qualified

Call one of our friendly highly experienced loan officers to discuss your transaction to see if you and the property are a fit for a HUD 223(f) loan. We will be pleased to size a loan for you that will give you a quote for maximum loan amount, along with loan expenses and projected time involved.

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