Multifamily ApartmentFHA / HUD 223(f) Acquisition & Refinance Loan Program

A HUD 223F loan is a type of loan that is offered by the U.S. Department of Housing and Urban Development (HUD) to help finance the acquisition, rehabilitation, and refinancing of multifamily properties. This loan program is specifically designed for properties that are at least three years old and require substantial rehabilitation. There are numerous benefits of obtaining a HUD 223F loan, and in this article, we will discuss some of the most significant ones.

Long-Term Fixed-Rate Financing

One of the most significant benefits of a HUD 223F loan is the long-term fixed-rate financing that it offers. This means that borrowers can secure financing for up to 35 years, with interest rates that are fixed for the entire term of the loan. This stability is highly attractive for property owners as it allows them to have a predictable payment schedule and budget accordingly.

High LTV Ratio

The Loan-to-Value (LTV) ratio is the percentage of the property’s value that the lender is willing to finance. With a HUD 223F loan, borrowers can secure up to 85% LTV ratio, which means that they only need to put down a minimum of 15% of the total property value as a down payment. This high LTV ratio allows property owners to finance a larger portion of their property value, freeing up capital for other uses.

Lower Interest Rates

HUD 223F loans are insured by the Federal Housing Administration (FHA), which allows lenders to offer borrowers lower interest rates than traditional commercial loans. These lower rates can lead to significant savings for property owners over the life of the loan, especially given the long-term fixed-rate financing.

Non-Recourse Financing

Another significant benefit of a HUD 223F loan is that it is non-recourse financing. This means that the borrower is not personally liable for the loan, and the lender’s only recourse in the event of default is the property itself. This provides significant protection for the borrower’s personal assets and is particularly important for multifamily properties that may have multiple investors.

Rehabilitation Financing

HUD 223F loans can be used to finance substantial rehabilitation of multifamily properties. This means that borrowers can finance the cost of repairs and improvements needed to bring the property up to code or make it more attractive to tenants. This can include upgrades to electrical and plumbing systems, roof repairs, and cosmetic improvements. The ability to finance rehabilitation costs allows property owners to improve the property’s value and generate higher rents.

Assumable Financing

Finally, HUD 223F loans are assumable, which means that if the property is sold, the new owner can assume the existing loan rather than having to obtain new financing. This can be a significant advantage for buyers as it allows them to avoid financing fees and potentially secure lower interest rates.

Third Party Reports

Appraisal, Capital Needs Assessment (CNA), & Phase I ESA are always required. Radon test reports are now required on all projects regardless of their EPA radon zone. Asbestos test reports are required for projects built pre-1989. Lead-based paint test reports are required for projects built pre-1978.

The appraisal provides an estimate of the market value of the property as well as the projected income and expenses that the property will achieve in its particular market and provides the basis for the Lender’s underwritten income and expense and value conclusions used to determine the final loan amount. The CNA provides an assessment of the property and site condition and identifies required immediate and future capital repairs and replacements. The CNA’s conclusions help determine any required repairs and repair escrow (if completed post-closing), the required initial deposit to replacement reserves due at closing, and the required monthly deposit to replacement reserves thereafter. The Phase I ESA determines whether any environmental conditions exist at the project that represent an unacceptable risk or which would require further action. Asbestos and lead-based paint testing evaluate the existence at the project of any asbestos containing material and lead-based paint and whether its condition poses a potential hazard which requires remediation or other follow-up action.

Escrows and Reserves

• Typical tax and insurance escrows (including MIP)
• Replacement Reserves: Minimum annual deposit of $250/unit
• Repairs identified in the CNA not completed prior to closing
• Debt Service Reserve: 9–12 months

TAX & INSURANCE.

HUD requires that the FHA Lender collect and maintain tax and insurance escrows in order to ensure that: (a) there are sufficient funds available to pay real estate taxes; and (b) there are sufficient funds available to pay insurance premiums for insurance coverages as required by the HUD Loan Program. The Lender typically collects an initial deposit at closing and subsequently bills for and collects funds to cover tax and insurance expenses along with each monthly principal and interest payment. The tax and insurance amounts collected at initial closing and each month is based upon the amount necessary to pay all insurance premiums, real estate taxes, and governmental assessments at least thirty days prior to each due date for each year during the term loan.

Replacement Reserves

HUD requires that the FHA Lender collect and maintain capital replacement reserves to ensure that there are sufficient funds available to fund capital replacement needs as they come due. Replacement reserves are typically held in escrow by the Lender in an interest-bearing account with an acceptable financial institution. At closing, the Lender is required to collect an initial deposit to capital replacement reserves and then bills for and collects funds for monthly capital replacement reserve deposits. The minimum HUD required initial and annual deposit is $250 per unit. The actual required initial and monthly replacement reserve deposit can be higher, based on a determination by the Lender and HUD during loan application processing. Such determination is based on the anticipated levels of funding required to meet anticipated capital replacement needs — based on a Capital Needs Assessment completed during application processing — and the HUD Loan Program requirements.

Repairs

At closing, HUD requires that the Lender collect and maintain an escrow for 100% of the estimated cost to complete required repairs identified in the CNA that are not completed prior to closing, plus a 20% contingency (10% on affordable projects) in case of cost overruns. The repair escrow is released upon completion of required repairs, except for a 2.5% repair estimate holdback for potential latent defects which may be released 15 months following completion of repair work assuming such repair work is in good order. On cash-out refinance transactions, HUD further requires that the Lender hold back 50% of cash-out proceeds until the completion of all required repairs.

In summary

A HUD 223F loan may be a better choice than a traditional bank loan for multifamily property owners due to its long-term fixed-rate financing, high loan-to-value ratio, non-recourse financing, rehabilitation financing, and assumable financing. Property owners should carefully consider their options and evaluate their financing needs before making a decision about which type of loan is right for their situation.

We hope you find this information helpful. If you are interested in seeing what an FHA / HUD 223(f) loan can do for your project, you can Apply Here. If you have further questions or would simply like to speak with an expert in the field, feel free to Contact Us or Call Dominick Prevete @ 908–220–6404.