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HUD and the FHA

The Department of Housing and Urban Development and the Federal Housing Administration were founded as two separate entities. In 1965, the FHA became part of HUD, after they began to share far more responsibilities than either had originally planned. HUD oversees and guarantees both residential and multifamily lending and insurance programs.

The FHA deals primarily in residential lending, aiding in the purchase of primary residences for Americans by providing loan insurance for single-family homes and multifamily properties with up to four units. The FHA is responsible for the overall management and administration of HUD's multifamily housing programs. HUD ultimately provides the insurance, however. 

HUD-INSURED LOANS

A common misconception is that HUD makes loans to developers and real estate investors for the recapitalization, acquisition, rehabilitation, and construction of multifamily properties. In reality, HUD only underwrites and insures these loans, which are provided by other lenders. 

A Loan for Many Purposes

The FHA or HUD 223(f) program was created for the refinance or acquisition of multifamily properties. Many believe that HUD only focuses on Section 8 properties, subsidized housing, or low-income housing. In reality, the HUD 223(f) program insures loans for the full spectrum of market-rate multifamily properties across the nation, with further considerations for low-income housing, rental assistance, LIHTC, and so on.

In contrast, the HUD 221(d)(4) loan, which we’ll discuss shortly, was designed for the construction or substantial rehabilitation of these same property types.

The HUD and FHA insurance programs were created to ensure the ongoing availability of capital for the acquisition, rehabilitation, development and refinancing of all apartment properties. This includes market-rate apartments, as well as affordable properties and subsidized housing.

HUD LOANS FOR MULTIFAMILY DEVELOPERS

The FHA or HUD 221(d)(4) program insures multifamily developers building market-rate, low-income, rental assistance and other multifamily developments. Loans generally range from $2,000,000 to $100,000,000 or more. In general, there is no hard cap or bottom for the loan amounts. However, because of the costs involved with originating HUD-insured multifamily development loans, developers of smaller multifamily projects are often intimidated by this form of financing. Thankfully, the FHA has embraced change and new operational efficiencies over the years. Despite that, HUD 221(d)(4) loans can still take 8-12 months to close, and often require an experienced financial intermediary to assist throughout the entire process.

AMORTIZATIONS AND MATURITIES

FHA-insured financing provides for the longest terms in the industry. But something else also sets these loans apart: all FHA loans are fully amortizing, creating the longest amortizations in the industry and the most flexibility on debt service coverage ratios. Why? Longer amortizations mean lower payments.

FHA-insured construction loans offer 40 years of fixed-rate financing plus up to 3 additional years of financing during the construction period. HUD 221(d)(4) provides one of the very few, if not the only, fixed-rate construction loans in the multifamily development business. Existing assets for purchase or refinance are similarly qualified to achieve very long term, fully-amortizing loans. For example, HUD 223(f) insured loans are fully amortizing for up to 35 years; provided the term and amortization does not exceed 75% of the property's remaining economic life.

As industry professionals know, the longer the fixed rate, the higher the interest rate (except for in the case of an inverse yield curve). However, since they are government-insured, FHA and HUD multifamily loans earn a AAA credit rating. This leads to rates that are lower than Fannie Mae® and Freddie Mac® 10-year fixed-rate loans

TIMING, RED TAPE

For all the benefits of HUD-insured loans (rates, leverage, term, amortization, etc.) there are undoubtedly additional hurdles to overcome. However, in the case of 221(d)(4) and 223(f), the process is not as lengthy and difficult as it may have been in the past (provided you are represented by an experienced intermediary).

HUD-insured loans require annual financial audits which may cost upwards of $2,500 per year. In addition, they take longer to close (223f loans may take 120 days, and 221d4 loans may take 10 months). Plus, there are more upfront costs and closing costs associated with the origination of HUD-insured loans. That said, a 223(f) insured loan isn't vastly different from originating a Fannie® or Freddie® multifamily loan. Other requirements involve things like: 

  • Environmental assessments to identify lead-based paint and asbestos reviews for properties built before 1978.

  • New property must not be located within a 100-year flood plain.

  • Substantial rehabilitation loans require adherence to Davis-Bacon labor standards.

Affordable properties

HUD multifamily loans include specific benefits for affordable properties. These include increased LTV allowances, reduced DSCR requirements, and lower mortgage insurance premium (MIP) requirements.

HUD multifamily loans such as the HUD 221(d)(4) and HUD 223(f) are also a great fit when combined with the Low-Income Housing Tax Credit (LIHTC) program, which offers investors a dollar-for-dollar federal tax credit in order to encourage investment in affordable properties. These loans also fit well with the Rental Assistance Demonstration (RAD) program, which allows properties using certain HUD legacy housing assistance programs to convert their properties to long-term Section 8 HAP (Housing Assistance Payment) contracts.

CONCLUSION

HUD-insured loans may not be for everyone. They certainly are not for small balance loans (as fixed origination costs translate to higher costs when interpreted as a percentage of the loan amount). If your need for financing is time sensitive, an FHA-insured multifamily loan may also not be the best fit. In general, HUD-insured multifamily loans also do not fit the needs of merchant builders.

Navigate our website as well as Multifamily.Loans to understand all the multifamily financing options available in order to make the best choice. No matter what kind of loan you choose, having the guidance of an experienced intermediary financing the acquisition, development, rehabilitation or recapitalization of apartment properties should result in a reasonably seamless process. 


Fill out the form below, or call (877) 585-8645 for a free consultation.

 
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HUD 221(d)(4) 
Nonrecourse, Ground-up Development and Substantial Rehabilitation Multifamily Financing

The FHA 221(d)(4) loan, guaranteed by HUD, is the multifamily industry’s highest-leverage, lowest-cost, nonrecourse, fixed-rate loan in the business. 221(d)(4) loans are fixed and fully amortizing for 40 years, not including an additional interest-only period of three years during construction.

HUD loans, unlike most bank loans, are almost completely asset based. This means that HUD scrutinizes the property location, pro forma rents and expenses, supply in that submarket, and, of course, the development team to ensure the project successfully delivers. HUD 221(d)(4) loans are more costly to originate upfront and take longer to close than traditional loans, but if you're working with an experienced intermediary, the costs and time to originate an FHA 221(d)(4)-insured loan are far outweighed by the benefits in the form of leverage, interest-rate risk mitigation, recourse, and more.

Learn more about the HUD 221(d)(4) program below, or click here for our easy-to-read HUD 221(d)(4) loan term sheet.

Overview of Terms, Qualifications, and Valuable Facts

HUD provides a full checklist of requirements, but much of the checklist and process is managed in-house. You can see the full HUD 221(d)(4) checklist here, and we offer an overview of the loan program’s main points below. When you’re ready, you can submit details to get a quote for a loan here.

Loan considerations

  • 40-year fixed and fully-amortizing interest rates are highly competitive, though borrowers must pay a mortgage insurance premium.

  • 221(d)(4) loans are interest only during the construction period, providing up to an additional three additional years of financing at the same fixed rate.

  • All loans must go through a HUD preliminary review process.

  • Adherence to Davis-Bacon prevailing wage standards is required.

  • An annual audit of operations is required.

  • Hard second liens are not allowed, but soft seconds and stock pledges are allowed if structured in accordance with HUD requirements.

  • A bonded general contractor is required.

  • The minimum loan amount is $4 million. Exceptions are made on a case-by-case basis. Generally, most 221(d)(4) construction loans are $10 million and above. There is no maximum loan amount.

Eligible Properties

The loan may be used for the construction or substantial rehabilitation of detached, semi-detached, walkup, row, and elevator-type multifamily properties, including market-rate, low-to-moderate income, and subsidized multifamily, cooperative housing and affordable housing properties with at least five units. 

commercial space limitation 

Commercial and retail space is limited to 25% of net rentable area and 15% of underwritten effective gross income. Up to 30% of underwritten EGI is permitted in urban renewal areas defined under Section 220.

ELIGIBLE Borrowers 

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

Use of Proceeds (substantial rehabilitation only) 

To qualify for substantial rehabilitation financing, a property must meet one of the following requirements: 

(a) the cost of repairs, replacements, and improvements to the existing property must exceed the greater of 15% of the replacement cost of the property after completion of all work or $6,500 per unit adjusted by the local HUD office for the specific area; or
(b) the replacement of two or more buildings, regardless of the cost.

loan amount/Leverage/Dscr

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

  • 85% LTC (or replacement cost), 85% of net operating income, or 1.20 DSCR for market-rate properties

  • 87% LTC (or replacement cost), 87% of net operating income, or 1.15 DSCR for affordable housing properties

  • 90% LTC (or replacement cost), 90% of net operating income, or 1.11 DSCR for rental assistance properties

Escrows

  • Replacement reserves are required in accordance with HUD guidelines.

  • Taxes and insurance escrowed monthly (post-construction).

  • Working capital reserve account equal to 4% of the loan amount (paid in cash or letter of credit (LOC)), with unused amount refunded, as per "additional items" below.

  • Operating deficit reserve equal to at least 3% of the loan amount; unused amount later refunded as per "additional items" below.

Mortgage Insurance Premium 

A mortgage insurance premium is paid annually. The MIP is payable at closing for each year of construction, then annually after construction. The mortgage insurance premium is 65 basis points for market-rate properties, 45 basis points for Section 8 or new-money LIHTC properties, and 70 basis points for Section 220 urban renewal projects that are not Section 8 or LIHTC. An MIP of 25 basis points is available for properties that qualify for a Green MIP reduction.

Term & Amortization

Loans have a maximum term of 43 years, which includes a maximum 36 months for construction and an additional 40 years of fully amortizing, fixed-rate payments.

Interest Rate

Interest rates are fixed throughout the life of the loan (both construction and permanent stages) and determined at commitment by prevailing market conditions. Thirty- to 80-day rate lock commitments are available. An early rate lock feature is available, allowing the borrower to lock the rate after preliminary underwriting. There is a 1% rate lock deposit payable at the time of the lock, which is refunded at closing. 

Recourse

All loans are nonrecourse to key principals during both construction and permanent financing, 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-insured loan amount. 

Prepayment

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

Replacement Reserves

Annual deposits are required for replacement reserves equal to the greater of:

  1. 0.60% of the total cost for new construction or 0.40% of the loan amount for substantial rehabilitation projects, or

  2. $250 per unit per year. In certain circumstances, HUD may consider waivers if calculations exceed $500 per door. 

Application

Market-rate property applications follow a two-step process: a pre-application followed by a firm application. Affordable and rental assistance properties may use MAP one-stage processing.

synopsis of costs

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

    • Appraisal

    • Phase 1 environmental review

    • Construction cost review

    • Market study

    • Plans and specs review

  • FHA exam fee: 0.30% paid as 0.15% at pre-application and 0.15% at application

  • FHA inspection fee: 0.50% paid from mortgage proceeds

  • Financing and placement fees, typically capped at 3.5% of the loan amount paid at closing from mortgage proceeds

  • Good-faith deposit (rate lock and commitment): between 0.50% and 1% of loan amount paid at the time of commitment and refunded at closing

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

Timing

One-stage applications for affordable and rental assistance properties generally take five to seven months to close, whereas two-stage applications for market-rate properties generally close in eight to 12 months, subject to deal specifics. 


Additional HUD Requirements and Items for consideration

  • An initial operating deficit account may be required to cover operating shortfalls incurred prior to stabilization. Usually, the amount will be equal to the greater of an appraiser's or underwriter's estimate, or four months of debt service for garden apartments, or six months of debt service for elevator buildings.

  • A working capital deposit in the form of cash or a letter of credit is required by HUD on all new construction projects in the amount of 4% of the loan amount. For substantial rehabilitation, the deposit would be 2% of the loan amount.

  • Unused working capital and initial operating deficit escrows are released at the later of 12 months from the final endorsement or six months of break-even occupancy.

  • Stabilization must be projected as achievable within 18 months of the certificate of occupancy.

  • The borrower must retain a qualified arms-length supervisory architect during the construction.

  • A cost certification for the general contractor and owner are required upon construction completion.

  • The general contractor must execute a GMP contract, provide a 100% performance and payment bond (either by cash escrow or letter of credit), and have a liquidity position equal to at least 5% of the project construction contract plus all incomplete construction work.

  • Loans more than $75 million may be subject to more conservative leverage and DSRC requirements.

  • Maximum underwritten occupancy of 93% for market-rate properties and 95% for 90% rental assistance properties.

  • Qualifies for Ginnie Mae-guaranteed, mortgage-backed securities, direct placement, or may be used to credit enhance tax-exempt bonds.


Learn More About 221(d)(4) Financing

If a HUD 221(d)(4) loan isn't right for your multifamily development or substantial rehabilitation project, please visit www.multifamily.loans for more options including bank financing, life insurance company financing, Fannie Mae, Freddie Mac, and more. You may also email Multifamily.loans directly at hello@multifamily.loans

Call us today for more information (877) 585-8645

Speak with a HUD Multifamily Mortgage Banker

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HUD 223(f)
The Only Way to Refinance or Purchase Apartment Buildings

HUD's FHA 223(f) multifamily loan insurance program has become quite popular in recent years. However, it's still grossly misunderstood and even unknown to many in the industry. Despite this lack of widespread recognition, the HUD 223(f) program offers financing with longer terms and longer amortization at a lower interest rate than Fannie Mae, Freddie Mac, CMBS loans, and even life company multifamily loans.

In the past, FHA 223(f) loans gained a reputation as being solely for nonprofits, low-income housing, and affordable housing projects. Because of this, many market-rate multifamily owner-operators have missed out on the industry's most affordable (and highest-leverage) financing mechanism.

HUD 223(f)-insured loans carry the stigma of taking longer to originate. And it’s true: Average origination times are around 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 easy-to-understand HUD 223(f) loan term sheet.


Overview of Terms, Qualifications, and Valuable Facts

HUD provides a full checklist of requirements for 223(f) loans. However, much of the checklist and process is managed in-house. You can see the full HUD 223(f) checklist here. We've also provided a synopsis of the FHA 223(f)-insured loan program below. When you’re ready, you can submit details to get a quote for a loan here

Loan Considerations

  • 35-year fixed-rate, fully amortizing loans

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

  • 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 loan 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 with at least five units. 

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/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 & AMORTIZATION

Fixed 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 nonrecourse 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

Generally, for best pricing, it's 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 AND ITEMS FOR CONSIDERATIOn

  • 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)-insured loan, please go to our Apply Page and follow the instructions. Or send an email with your contact information and info about your project to hello@multifamily.loans today. 

If a HUD 223(f) loan isn't right for your multifamily development or substantial rehabilitation project, please visit Multifamily.Loans for more options that include bank financing, life company financing, Fannie Mae, Freddie Mac, and more, or email the Multifamily.Loans team directly at hello@multifamily.loans.

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HUD 223(a)(7)
The Fast, Affordable, Easy FHA Multifamily Loan

The HUD 223(a)(7) loan is exclusively for the refinancing of existing debt on multifamily and health care properties backed by the Department of Housing and Urban Development. This can reduce interest rates, increase amortization, and subsequently improve property cash flows while reducing the cost of debt service. In the eyes of HUD, this significantly reduces the chance of a loan default.

A new HUD 223(a)(7) loan can even absorb prepayment penalties associated with existing debt. As a result, you don't have to wait 10 years to refinance if, for example, there is substantial downward pressure on treasury yields.

Furthermore, the streamlined and affordable nature of the product produces fewer hoops to jump through than even a residential mortgage on a single family home. There is no appraisal, market study, or environmental report required. The only new third-party report required is a project capital needs assessment, or PCNA.

The notable out-of-pocket cost? The HUD application fee, which is 0.3% of the loan amount due at application. Half of this is refunded after closing. 223(a)(7) loans typically close about 60 days from application. This really is the fastest, easiest, and most affordable multifamily loan that one can get. However, it exists only for those investors with existing loans like the 223(f), 221(d)(4), and other HUD-insured multifamily and health care loans. 

Click the link below to learn more, or simply click here to check out our HUD 223(a)(7) loan term sheet.

HUD 223(a)(7) Highlights

Eligible Properties

Multifamily and health care properties with existing HUD-insured debt. 

Maximum Loan Amount

No cash-out is permitted. Loans are limited to 100% of the eligible transaction costs, including the principal amount of existing debt, prepayment penalties, repairs, fees, third-party reports, and initial reserves deposit. The loan is subject to a maximum DSCR of 1.11x for for-profit entities and 1.05x for nonprofit entities. Expenses are underwritten based on the last three years of actual operating data and FHA field office estimates. 

TERM & AMORTIZATION

The term of the loan may be extended by up to 12 years, as long as the new term does not exceed the initial loan term — 40 years in the case of 221(d)(4) and 35 years in the case of 223(f)

RECOURSE

All loans are nonrecourse to key principals both during construction and permanent financing, subject to standard carve-outs.

ASSUMABILITY

All loans are fully assumable subject to HUD approval and a fee of 0.05% of the original HUD-insured loan amount. 

PREPAYMENT

Generally, for best pricing, 10 years of call protection with a two-year lockout, followed by a step down from 8%. There is no prepayment penalty if the loan is assumed. 

Timing

HUD 223(a)(7) loans typically close 60 days from application. 

Third-Party Reports

Third-party reports are limited to a project capital needs assessment (PCNA), which is required every 10 years. 

Fees

HUD charges an application fee equal to 0.3% of the loan amount due at the time of application, half of which is refunded after closing. The balance of fees and costs are typically capped at 2.0%. 

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HUD 241(a): Supplemental Financing For HUD-Insured Mortgages

A HUD 241(a) loan offers additional financial assistance to property owners who want to enhance their multifamily properties by making significant improvements. Acceptable HUD 241(a) improvements could include the addition of energy-efficient infrastructure or necessary safety equipment. HUD 241(a) loans may also be used to purchase additional land or to finance the hard and soft construction expenses necessary to expand the footprint of an existing structure.

Keep reading below to learn more, or click here to check out our HUD 241(a) loan term sheet.


Overview of Terms, Qualification, and Valuable Facts

Potential borrowers should completely review HUD's complete checklist of requirements before beginning the application process. However, borrowers should be aware of one key restrictions could affect their chances for funding approval for a HUD 241(a) loan — the loan cannot exceed the property’s appraised value, and it is primarily for keeping multifamily units competitive in today’s market.

Our Apply Page provides a way to apply for funding through the program.

Eligible Properties

Only multifamily properties encumbered by HUD-insured loans are eligible.

Eligible Borrowers

People who own an FHA-insured or HUD-held multifamily property may qualify for a HUD 241(a) loan.

Loan Amount

The maximum loan amount will be the lesser of:

  • Up to 90% of the value of a new construction project for for-profit entities and 95% for nonprofit entities

  • The project’s maximum insurable amount as determined by HUD

  • Up to 90% of the net operating income, which should include the first mortgage debt payment obligation

DSCR

Borrowers should expect a DSCR of at least 1.11x.

Occupancy

Requirements should not exceed the existing terms of the underlying mortgage.

Escrows

Escrow is determined by previous mortgage restrictions.

Mortgage Insurance Premium

Borrowers should expect to pay an annual mortgage insurance premium of 0.95% of the principal loan amount. Certain projects may qualify for a reduced mortgage insurance premium, which could range from 0.25% to 0.35% if the project meets additional environmental or affordability restrictions.

Term and Amortization

The length of the HUD 241(a) must match the same term as the first mortgage. However, if less than 25 years remain on the mortgage term, the term can extend up to 40 years. An extended mortgage term cannot exceed 75% of the remaining useful life of the improvements.

Interest Rate

Borrowers can expect a fixed interest rate reflective of the current market rate at closing.

Recourse

Like all FHA multifamily loans, the HUD 241(a) is nonrecourse.

Assumability

Loans are assumable provided the borrower meets HUD approval.

Prepayment

Terms can vary. A five-year lockout with a 5% penalty in the sixth year, or a two-year lockout with an 8% penalty in the third year are two common terms. Borrowers can expect a comparable combination of penalties and lockouts for the first 10 years of the loan.

Synopsis of Costs

Cost of third-party reports vary by market. Borrowers may need:

  • Environmental studies (Phase I Environmental Reports commonly required if the building is expanded or significant building improvements are suggested)

  • Market studies

  • Full appraisal reports

  • Architectural and engineering reports

  • Seismic reports

  • HUD Application Fee equal to 0.3% of the loan amount

  • HUD Inspection Fee equal to 0.5% of the loan amount

  • Finance and permanent placement fees of up to 3.5% of the loan amount due at closing

  • The lender may also charge a reasonable fee to offset title, legal and other closing costs.

Timing

HUD 241(a) loans can close within 20 weeks. This timeline allows eight weeks for the pre-application process and eight weeks for the firm application process. Borrowers should expect to wait another three to four weeks for closing. If the loan will fund a new construction project or substantial rehabilitation, borrowers can opt for single-stage processing to decrease the overall application period.


Additional HUD Requirements and Items for Consideration

  • HUD 241(a) loans are subject to the same restrictions and regulations that govern the root mortgage loan insurance program.

  • Borrowers must meet the same IOD requirements and working capital requirements that govern the 221(d)(4) program, unless they obtain waivers.

  • David Bacon wage requirements apply to contractors working on the project.

  • Borrowers should expect to schedule a pre-application conference with the local HUD Program Center or Multifamily HUB to verify the feasibility of the proposed multifamily property improvements.


Get Qualified!

To begin the HUD 241(a) application process, email us your contact and project information to hello@multifamily.loans today. Borrowers can also apply for an FHA-insured multifamily loan online and follow the listed instructions to start an application.

The HUD 241(a) loan doesn't meet the unique needs of every multifamily property owner. To learn about other financial options to update or expand and improve your apartment building portfolio, email us directly at hello@multifamily.loans. Potential borrowers can also visit www.multifamily.loans for additional options that may include Fannie Mae Apartment Loans, Freddie Mac Small Balance Loans, bank financing and life company financing for multifamily properties.

Call Now: (877) 585-8645

Speak With a HUD Insured Multifamily & Healthcare Finance Specialist

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HUD 232/223(f) Healthcare - Purchase Financing & Refinancing

The HUD 232/223(f) loan program is to secure financing or refinancing for residential care facilities. Investors may qualify for this HUD-insured funding for the purchase, rehabilitation or refinance of facilities such as nursing homes, board and care properties, and assisted living centers. The Office of Residential Care Facilities, under the purview of the Federal Housing Administration, oversees HUD 232/223(f) loans.

HUD loans are backed by the federal government and available through FHA-approved lenders. HUD 232/223(f) financing is a sound option for investors expanding into the residential care sector or that wish to improve the quality of existing facilities with long-term, fixed-rate, nonrecourse senior debt.

Learn more about the HUD 232/223(f) program below, or click here for our easy-to-read HUD 232/223(f) loan term sheet.


Overview of Terms, Qualification, and Valuable Facts

HUD 232/223(f) loans may be used to refinance or purchase existing properties, to renovate existing facilities, or a combination of these purposes. For example, HUD funding for a new purchase of a board and care facility and rehabilitation of a nursing home is acceptable.

HUD 232 is a loan product for borrowers seeking new financing. Those with existing FHA funding can access the streamlined refinancing process through HUD 223(a)(7). This option helps borrowers reduce interest rates and increase cash flow to existing projects.

There are strict guidelines about qualifying properties for a 232/223(f) loan. Developers must show that facilities meet licensing standards and fulfill the right purposes. Specifically, there is a cap in the percentage of independent living units allowed in qualifying buildings. Facilities must not be new, and borrowers themselves are scrutinized closely.

Eligible Properties

HUD's FHA 232/223(f) loans are for health care properties, specifically skilled nursing care facilities. Eligible properties must be already established and not projects in the planning or construction stages. HUD requires that properties are:

  • Skilled nursing or assisted living facilities

  • Licensed and regulated by municipality or state authorities

  • Offering care for people needing long-term care or medical attention

  • A minimum of three years old (recent expansions are acceptable as long as they aren’t larger than the original facility)

Additionally, HUD has strict guidance on the usage of the properties. For example, assets must meet the following requirements:

  • Commercial space may not exceed 20% of floor area or income

  • Independent living units may not exceed 25% of the facility

  • Property must accommodate 20 or more patients requiring continuous or skilled nursing care

Properties with entrance fees are ineligible, as are hospitals, clinics, halfway houses, and similar facilities. Similarly, properties that do not provide continuous care — such as retirement homes or boarding houses — are also ineligible.

Eligible Borrowers

  • For-profit, nonprofit, and public borrowers are eligible. This group may include investors, developers, builders, and nonprofit entities.

  • FHA & HUD requires borrowers to be experienced owner-operators of similar facilities.

  • Credit and financial capacity requirements must also be met.

Use of Proceeds

In addition to strict guidelines on loan borrowers and eligible properties, HUD imposes limitations on how funds can be utilized. Specifically, HUD allows for the financing of reserve funds for replacement over a 15-year period, but those rehabilitation costs cannot exceed 15% of the project's overall value once repairs are complete.

Loan Amount/Leverage/DSCR

The maximum loan amount depends on the nature of the borrower, as the FHA sets different rates depending on whether the debtor is for-profit or nonprofit.

For-Profit Borrowers

  • For acquisitions, the lesser of 85% of acquisition price or appraised value

  • For refinance, the lesser of 100% of the cost to refinance or 85% of appraised value

Non-Profit Borrowers

  • For acquisitions, the lesser of 90% of acquisition price or appraised value

  • For refinance, the lesser of 100% of the cost to refinance or 90% of appraised value

For larger loans within these guidelines, the HUD/FHA application process may require greater credit scrutiny.

The debt service coverage ratio (DSCR) must be greater than or equal to 1.45x.

Synopsis of Costs

The costs associated with a HUD 232/223(f) loan are dependent on specific loan circumstances. In general, borrowers are responsible for:

  • Nonrefundable HUD application fee of 0.3% of the loan principal

  • FHA inspection fee of 0.5% paid from loan proceeds

  • Lender application fees applied to due diligence activities and third-party reports, including credit reports, appraisals, plan reviews, and market studies

  • Good faith deposit (rate lock and commitment): Between 0.5% and 1% of loan amount paid at commitment and refunded at closing

  • Initial replacement reserves

  • Standard borrower closing costs

Escrows

Escrows are required for taxes, mortgage insurance premiums, property insurance and depreciable item replacement reserves. If repairs are needed, a 120 percent refundable escrow is required, 100 percent of which is funded from loan proceeds and 20 percent of which is funded by the borrower.

Mortgage Insurance Premium

The annual mortgage insurance premium is 1% payable at closing. The MIP is 0.65% annually thereafter.

Term & Amortization

Loans must last a minimum of 10 years. The maximum term on an HUD 232/223(f) loan is 35 years or 75% of the remaining life of the facility, fully amortizing.

Interest Rate

HUD's FHA 232/223(f) loans are at a fixed interest rate, subject to market conditions. Your HUD lender can provide more information about interest rates if you explore the option of applying for an HUD 232/223(f) loan.

Recourse

HUD loans are nonrecourse to principals with standard carve-outs.

Assumability

The loan is assumable with FHA/HUD approval. The assumption fee is 0.05%, payable to HUD.

Prepayment

Prepayment is generally an option with approved HUD 232/223(f) mortgages. The standard structure includes a two-year lock-out where prepayment is not an option followed by a step-down with declining penalties.

Application

FHA 232/223(f) are subject to the Lean application process. This streamlined procedure eliminates paperwork reduplication and implements a checklist for lenders and borrowers to follow in order to promote efficiency within the application process. It generally progresses in five steps:

  1. Submission of application

  2. Preliminary underwriting

  3. Initiation of third-party verification and due diligence measures

  4. Receipt of HUD firm commitment letter

  5. Finalization of loan documentation and closing

Refinanced Properties

Any current mortgages or other loans incurred on the property within two years of application must meet specific program eligibility guidelines and may have seasoning requirements. Equity take-out loans may be eligible for immediate refinancing, depending on the loan amount and HUD-insured loan-to-value ratio.

Timing

Lean transactions for HUD's FHA 232/223(f) loans typically take four to six months from application to closing. The actual time frame varies depending on the complexity of the application and the receipt of applicant information.

Post-Closing Reporting

FHA 232/223(f) loans require the owner of the property to submit audited financial statements annually within 90 days of the close of the fiscal year. These statements must be prepared in accordance with 24 CFR 5.801 and 200.36 guidelines. Additionally, the operators of the property must submit quarterly financial statements.


Get Qualified!

To apply for a HUD 232/223(f) loan, simply click below.

If a HUD 232/223(f) loan isn't right for your residential care facility project, visit Multifamily.Loans for more options that include bank financing, life company financing, Fannie Mae, Freddie Mac and more.