The Best Way to Refinance or Purchase Apartment Buildings

HUD's FHA 223(f) multifamily loan insurance program is incredibly popular — and for good reason. However, it's still relatively unknown to many in the industry. The loan program offers financing with longer terms and longer amortizations at a lower interest rate than Fannie Mae, Freddie Mac, CMBS loans, and even life company multifamily loans.

HUD 223(f) loans are available for market-rate properties as well as those with affordable housing components.

HUD 223(f) loans carry the stigma of taking longer to originate. And it’s true: Originations can take as long as four months from application to closing. However, if you're not in a great hurry, that's only 60 days longer than the average window to close a Freddie Mac multifamily loan or even a Fannie Mae DUS multifamily loan.

Read more below, or click here to download our straightforward HUD 223(f) loan term sheet.

HUD 223(f) Terms, Qualifications, and Facts

HUD provides a full checklist of requirements for 223(f) loans. Much of the checklist and process is managed inhouse.

Check out the synopsis for this program below. Then, submit your details in the form below and we'll be back with a free quote. 

Loan Considerations

• 35-year fixed-rate, fully amortizing loans

• Interest rates are very competitive, but borrowers must pay MIPs

• To be eligible, the property must be at least three years old or substantially rehabilitated at least three years ago. Standard repairs are allowed.

• Monthly funding of replacement reserves is required with initial funding of replacement reserves — sometimes as much as $1,000 per unit for older properties.

• An annual audit of operations is required.

• The minimum loan amount is $2 million, with exceptions made on a case-by-case basis.

Eligible Properties 

The main limitation is that a property must have five units. HUD 223(f) loans may be used for purchasing or refinancing detached, semi-detached, row, walkup, and elevator-type multifamily properties, including market-rate, low-to-moderate income, and subsidized multifamily, cooperative housing, and affordable housing properties. 

Commercial Space Limitation

Commercial and retail space is limited to the lesser of 20% of net rentable area or 20% of effective gross income. 

Eligible Borrowers

Borrowers must be single-asset, bankruptcy-remote, for-profit or nonprofit entities.

Loan Amount, Leverage, and DSCR

The loan amount will be maximum proceeds, subject to the lesser of:

• 83.3% LTV or the amount of debt that can be serviced by 83.3% of net operating income for market-rate properties

• 85% LTV or the amount of debt that can be serviced by 87% of net operating income for affordable housing properties

• 87% LTV or the amount of debt that can be serviced by 90% of net operating income or more for rental assistance properties

• For refinancing: the greater of 80% LTV or 100% of the total cost of refinancing the existing debt and other financing costs

• For purchases: 100% of mortgageable transaction costs, excluding the portion of grants, public loans, and tax credits applied

• Statutory per-unit limits applied

Occupancy

Properties must have an average actual occupancy of at least 85% for the six months prior to application. This level of occupancy must be maintained throughout the process until funding. The maximum underwritten occupancy for market-rate properties is 93%; for affordable properties and rental assistance properties, it's 95%. 

Escrows

The replacement reserves required in accordance with HUD guidelines (minimum of $250 per unit per year) will be established by a PCNA report. An initial deposit will be required at closing, which can be funded by mortgage proceeds. Taxes and insurance are escrowed monthly.

Repairs and Improvements

Repairs, deferred maintenance, and capital improvements for up to the greater of 15% of the property value, $6,500 per unit (adjusted for high-cost areas), or 20% of the mortgage proceeds can be included in the loan amount, subject to leverage and DSCR limitations. 

Mortgage Insurance Premium 

The mortgage insurance premium is paid annually. At origination, 1% of the loan amount is due to HUD at closing from loan proceeds as the first-year MIP. It's 0.60% annually thereafter, with an adjustment to 0.45% for affordable properties.

Term and Amortization

HUD 223(f) loans are fixed-rate and fully amortizing for up to 35 years. The term may not exceed 75% of the remaining economic life of the property. 

Interest Rate

Interest rates are fixed throughout the life of the loan and determined by prevailing market conditions. While 223(f) interest rates are often lower than bank and agency loans, they do require borrowers to pay MIP. 

Recourse

All loans are non-recourse to key principals, subject to standard carve-outs.

Assumability

All loans are fully assumable, subject to FHA approval and a fee of 0.05% of the original FHA loan amount. 

Prepayment Penalties

Generally, for best pricing, loans have 10 years of call protection structured as a two-year lockout, followed by a step down from 8%. There's no prepayment penalty if a loan is assumed. 

Synopsis of Costs

• Application fee: generally $25,000 to cover third-party reports and due diligence, including:

  • Appraisal

  • Phase 1 environmental review

  • PCNA

  • Market study

• FHA application fee: 0.30% of the loan amount

• FHA inspection fee:

  • $30 per unit where the repairs are more than $100,000 in total but $3,000 or less per unit

  • The greater of $30 per unit or 1% of the cost of repairs if the repairs required are greater than $3,000 per unit

• Finance and permanent placement fees: typically capped at 3.50% of the loan amount, paid from mortgage proceeds

• Good-faith deposit (rate lock and commitment): 1% of the loan amount, paid at the time of commitment and refunded at closing

• Lender's legal, title, and other standard borrower closing costs

Timing

FHA 223(f)-insured loans generally take 100 to 150 days to close, subject to deal specifics.

Additional HUD Requirements, Items

• Loans over $50 million may be subject to more conservative leverage and DSCR constraints.

• FHA 223(f) can be used in conjunction with LIHTC.

• FHA 223(f) can be used to refinance or acquire properties that involve Section 202, Section 236, and Section 8 funding.

• A Project Capital Needs Assessment (PCNA) will be required every 10 years.

• Davis-Bacon requirements do not apply to repairs.

Get Qualified!

To apply for a 223(f) loan, fill out the form below. We'll get back to you with quotes. 

If a HUD 223(f) loan isn't right for your multifamily development or substantial rehabilitation project, visit Multifamily Loans for more options that include bank financing, life company financing, Fannie Mae, Freddie Mac, and many others.