HUD Eliminates Three-Year Rule on 223(f) ApplicationsPaul Winterowd
Exciting news for value-add and new construction investors! On March 2, 2020, HUD announced the elimination of the three-year lock-out rule for applications to refinance or acquire existing properties under the Section 223(f) loan program.
This exciting change will open up opportunities for borrowers to refinance stabilized multifamily properties much sooner after construction completion and lease-up than previously available.
This primarily benefits those whose business model is to maximize leverage. Virtually all other loan programs – banks, Fannie Mae, Freddie Mac, Life Companies – look at Loan To Cost for newly built or renovated properties.
There is no Loan To Cost constraint in the HUD 223(f) program meaning only value and debt coverage will determine loan size. The program allows up to 80% LTV on a cash out refi – even on a newly constructed or rehabbed property.
You can apply for HUD financing on newly built or substantially rehabilitated properties as soon as one month after the property achieves applicable Debt Service Coverage Ratio (DSCR) which is 1.17 for market rate properties.
In other words, the in-place income for the property needs to meet a 1.17 debt coverage ratio for the desired loan amount in order to start the application process.
The new rule applies to all applications for Section 223(f) mortgage insurance, except Section 232 healthcare properties.
We expect a spike in applications due to this exiting change so one thing to consider is timing. We strive to close these loans as quickly as possible, however a six-month runway to close is recommended.
Key Revisions to 223(f):
- All projects submitted within three years of issuance of final Certificate of Occupancy must have a minimum DSCR of 1.17 for market rate projects and 1.11 for Broadly Affordable projects.
- To calculate the required programmatic DSCR, HUD will underwrite to actual revenue collected less normalized operating expenses.
- The current rent roll shall evidence existing achieved rents as well as rents that were used to underwrite the existing first mortgage.
- The leasing history of the project commencing from initial occupancy to application submission, as well as the lease-up projection used to underwrite the existing first mortgage will be required.
- Any Rent concessions, other discounts and short-term leases (less than 12 months) that are offered by the owner to induce a prospective tenant to enter into a lease must be disclosed and discussed in the Lender’s Narrative.
- Cash out is permitted if the property meets programmatic DSCR. However, 50% of available cash will be held by the lender until the property achieves the minimum applicable DSCR for six consecutive months, inclusive of the months of minimum debt coverage required prior to endorsement.
In summary – this is an exciting development that will give multifamily investors new financing options and greater opportunities to leverage their portfolio with non-recourse debt for continued wealth creation.
Now is a good time to contact Bonneville Multifamily Capital to perform an initial loan sizing to determine your benefit in participating in the HUD 223(f) mortgage insurance program. If you should have any questions, please feel free to contact me at 801-323-1050 or at firstname.lastname@example.org
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