What Are HUD FHA 223(f) Mortgage Loans?
HUD FHA 223(f) can be your ticket to ride and become an important financial tool in your efforts involving acquisition or refinancing of multifamily developments valued at $1 million and above.
Although you may be familiar with the Department of Housing and Urban Development (HUD), did you know that the Federal Housing Administration (FHA) provides loans designed for multifamily property owners?
HUD 223(f) Loan Basics
The short of it is, with this loan type, borrowers have the ability to get maximum leverage through longer terms and fixed rates. A big plus is that there are no income or rent restrictions, which means you have more flexibility with how you use the funding, and these loans are available for projects starting at $1 million (with no maximum), and with fixed rates available up to 35 years.
Guidelines for Eligible Properties
Not every property will be eligible, therefore, it’s important to take a look at the requisite qualifications before you decide to pursue a 223(f) mortgage loan. Property eligibility requirements include:
- Housing property with at least five units
- Complete kitchens and baths in each unit
- Market rate or rental assistance properties
- Properties were completed or substantially rehabilitated at least three years prior to the mortgage application date
- Percentage of commercial area (such as retail or office space) in the multifamily building does not exceed 25 percent of rental area and 15 percent of total gross revenues of the building.
- Excludes student rental properties that offer “per-room” rents
- Repair costs that do not exceed 15 percent of the value after rehabilitation; repairs can be included in the loan
Advantages and Disadvantages
Before pursuing a 223(f) HUD mortgage, it’s important to understand the pros and cons of these loans.
The advantages include a maximum Loan To Value (LTV) of 85% for market-rate properties, 87% for affordable housing, and 90% for project-based rental assistance properties (the highest available). These loans are available for multifamily properties in all 50 states in the U.S., plus the territories of Guam, the U.S. Virgin Islands, and Puerto Rico.
There is no refinance or interest rate risk since the loan terms are fixed for the entire term – in other words – no balloon payment. They are also assumable loans, giving you an exit strategy if needed, and real value when it comes time to sell the property.
The interest rates on these loans are second to none and when combined with longer amortization periods (35 year vs. 30 year max on all other commercial loans), your monthly payments are going to be lower than other loan types. This means more net cash flow to the property owner!
Knowing the disadvantages is essential to the decision-making process, and include–working with a government agency. That means it will take longer to process a loan (plan on five to seven months). You will pay mortgage insurance premium (MIP), and must submit annual operating statements for audit, as well as be subjected to HUD property inspections. Fees and expenses on these loans can also be higher, and will generally include:
- Third-party reports (appraisals, environmental analysis, flood certification, etc.)
- Inspection fees for FHA
- Financing fees, depending on complexity and size of the loan
- Mortgage Insurance Premium
- Title and recording fees
- Legal fees
Despite these hurdles, many multifamily property owners believe that a HUD FHA 223(f) loan is their best option for financing because they have taken the time to compare and contrast their options in the marketplace. If you plan on holding the asset long term, it’s hard to beat the benefits of a HUD loan given today’s extremely low interest rates.