The HUD 223(f) loan program is often overlooked by those who assume this type of loan is only for non-profit and affordable housing projects. HUD 223(f) loans are used frequently for low-income housing, non-profit organizations, and affordable subsidized housing projects. However, they can also be used by investors and developers of Class A market-rate apartment units. Here, we look at the advantages and disadvantages of the HUD 223(f) program for investors with multifamily apartments.
Advantages of HUD 223(f) Transactions
The HUD 223(f) loan is non-recourse and fully assumable, and it is subject to both the lender and FHA approval. HUD typically charges a 0.50% TPA (Transfer of Physical Asset) fee for full ownership transfer transactions. If you are looking for a non-recourse, assumable loan for the purchase or refinance of a multifamily apartment project, read on to learn more about the advantages of HUD 223(f) transactions.
This loan program offers a low-interest, 35-year fixed rate that is fully amortized. A fixed rate eliminates interest rate risk. With the HUD 223(f), borrowers will not have to refinance at a higher rate to pay off an existing product with a balloon payment that’s due at the end of a short-term fixed-rate loan that is amortized over 30 years.
Many clients like the benefit of knowing that interest rate risk is eliminated. Investors and developers will be better able to predict future cash flows without having to factor in possible rising interest rates.
High Loan-to-Value and Low Debt-Service-Coverage-Ratio
HUD 223(f) transactions allow for higher LTV (loan-to-value), up to 90%, for subsidized housing with a minimum DSCR of 1.11. Market rate transactions allow up to 85% LTV with a 1.176 DSCR. The maximum LTV on a cash-out transaction is 80%. The DSCR (Debt Service Coverage Ratio) is 1.176%, which is significantly lower than many bank loans that require a DSCR of 1.25% or higher. This product allows for up to 80% for cash out, 85% for non-cash out, and up to 90% for affordable transactions.
A Mortgage Insurance Premium (MIP) is required, but the MIP is multiplied by the reduced outstanding principal balance every 12 months. There are no graphical restrictions to these loans.
Disadvantages of HUD 223(f) FHA Transactions
There are disadvantages to the HUD 223(f) that some investors or developers might not be able to overlook. One of the greatest disadvantages is the time it takes to process a HUD 223(f); anywhere from 4 to 7 months. As with all HUD loans, there is a great deal of paperwork required. Additionally:
- This program requires higher initial replacement reserves (estimated $1,000 per unit), and a MIP (Mortgage Insurance Premium) is required.
- HUD property inspections are mandatory.
- The transaction process takes two to three months longer than Fannie Mae and Freddie Mac programs.
- Annual financial statement audits by a CPA (Certified Public Accountant) are required.
- Third-party reports are more expensive.
Learn More About HUD 223(f) Loans
For most for-profit, non-profit
s, and affordable housing investors, the benefits of HUD 223(f) far outweigh the negatives. In addition, HUD has streamlined its underwriting processes and has consolidated offices to increase processing times.
If you have questions about the HUD 223(f) program and if it’s right for you, give us a call. LSG Lending Advisors will provide you with a detailed proposal of terms and costs so you can make an informed decision.