Exploring the Benefits of Using HUD 223(f) Loans
HUD 223(f) loans offer some of the best terms in the industry for the acquisition and refinancing of multifamily and apartment properties. These loans are non-recourse, offer high leverage, low interest rates, and lenient DSCR requirements. While HUD 223(f) loans have many benefits, they are often misunderstood. In fact, many in the industry mistakenly believe that FHA 223(f) loans are only available for low-income housing, nonprofits, and affordable housing projects, however, this is not the case. Due to these misconceptions, many market-rate borrowers miss out on one of the multifamily industry's most affordable, highest-leverage financing tools.
What are the Terms for HUD 223(f) Loans?
The terms of HUD 223(f) loans are as follows:
Loan amount: $1 million, not set maximum
Terms: Between 10 and 35 years
Leverage: Up to 85% LTV for market-rate properties, 87% LTV for affordable properties, 90% LTV for properties using rental assistance.
Interest rates: Rates currently range from 4.10% to 4.75% (including MIP)
DSCR requirements: 1.18x for market-rate properties, 1.15x for affordable properties, and 1.11x for rental assistance properties.
What are the Drawbacks of HUD 223(f) Loans?
While HUD 223(f) loans have a variety of benefits, they also have certain drawbacks, which potential borrowers should be aware of. For example, HUD 223(f)-insured loans typically take a minimum of 4.5 months to close, and can often take up to 6 months if any complexities arise during the closing process. This is about 60 days longer to close than the average Freddie Mac multifamily loan or Fannie Mae D.U.S. multifamily mortgage, and about 45 days longer than CMBS loans, which can often close in as little as 3 months.
How do HUD 223(f) Loans Compare to Other Types of Multifamily Financing?
While extended closing times can be an issue for certain borrowers, it’s important to understand that the HUD 223(f) program offers longer terms and longer amortization at a lower interest rate than CMBS loans, Fannie Mae, Freddie Mac, and life company multifamily loans. For instance, Freddie Mac Fixed-Rate Conventional Loans, which start at $5 million, only offer up to 30-year fixed-rate loan terms, while Freddie Mac Small Balance Loans, which start at $750,000, only offer up to 10-year fixed-rate loan terms and up to 20-year adjustable-rate terms. Both loans offer a maximum of 80% LTV, noticeably less than HUD 223(f) loans.
Fannie Mae DUS loans, which start at $3 million, are somewhat similar to Freddie Mac, in the sense that they offer up to 30-year loans with up to 30-year amortizations, with LTVs up to 80%. Fannie Mae DUS Small Loans, which start at $750,000, offer the same. While many Freddie Mac and Fannie Mae loans do offer fully amortizing options, this doesn’t always mean that a borrower will be approved for fully-amortizing financing.
CMBS loans rarely have fixed-rate loan terms of over 10 years, with 15 years usually being the maximum (and only done in special situations). This means that a property sale or refinancing will typically always be required at the end of the loan term, which can be expensive and inconvenient for investors who wish to hold onto a property for more than 10 years. Of course, CMBS financing is generally much easier to become approved for than HUD/FHA multifamily loans (or Fannie Mae/Freddie Mac loans), as it generally focuses on the value of the real estate asset itself and less on borrower history and financials.
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