How Can Real Estate Investors Use HUD 223F Loan?

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As real estate investors, we are always looking for opportunities unique and creative means of financing our transactions. Sometimes government programs encourage certain types of real estate investments, and the HUD 223 (f) loan is just that.

So how can real estate investors to use HUD 223 (f) loan? In short, this program allows investors to acquire or refinance a multi-family property using a non-recourse loan, higher leverage, low interest rate and a lenient DSCR loan.

Here is an overview of HUD 223 (f) for real estate investors, the pros and cons of this loan product, and whether real estate investors should try to get in on the action.

HUD 223F Multifamily Loan: An Overview

Implemented in 1975, this HUD financing product was designed to help encourage the development and renovation of multi-family assets, particularly for affordable housing. This loan has a reputation for being reserved for non-profit, low-income and affordable housing projects. It’s a common misconception, and it’s why many real estate investors miss it.

While the application process may take a little longer, the 223 (f) Multifamily Loan has extended terms and amortization at lower rates than typical loan products. Since this is a government loan, the loan submission requirements are onerous.

The HUD 223 (f) loan is also fully assumable. It also gives investors a exit strategy later if they want to liquidate, as potential buyers can take on the desirable terms (see below) of this loan product.

This loan is available for all multi-family assets, and while it takes a bit longer to close than traditional loan products, it has some key positive features that should be noted:

  • Fixed loan term of 35 years with amortization, but not exceeding 75% of the remaining economic life of the property.
  • The loan can be taken over.
  • Interest rates are competitive, but borrowers pay a mortgage insurance premium (PMI).
  • Properties must be at least three years old.
  • Units must have funding or replacement reserves.
  • An annual audit of operations.
  • Fixed interest rate determined by market conditions.
  • 85% LTV or 80% in the event of cash-out refinancing.
  • DSCR: 1.18x for market rate properties and 1.15x for affordable housing.

The PMI consists of a one-time fee of 1% of the loan amount, due at closing, and an annual fee of 0.60% of the loan amount for non-affordable housing, or 0.45% for property considered to be affordable projects.

The 35-year term and low fixed interest rates eliminate some key risks for investors. First, there is no associated long-term refinancing risk, and the prospect of rising interest rates is mitigated by freezing rates at a fixed rate. In addition, personal liability is minimized as it is a non-recourse loan.

Here are some of the downsides of the HUD 223 (f) loan that real estate investors should note:

  • The application process can take four to seven months.
  • Much more paperwork and submission requirements.
  • Need for higher cash reserves (approximately $ 1,000 per unit).
  • High administrative fees.
  • MIP requirement.
  • CPA annual audit requirement.

In March 2020, the HUD approval process was also updated to reduce the minimum building age from three years to 30 days.

Multifamily 223 (f) Acquisition and Refinancing Checklist

According to HUD, there are a number of application requirements for this type of mortgage in order to ensure the success of the application. These include, but are not limited to, the following:

  • FHA Application Fee (0.3% of mortgage amount / $ 3.00 per $ 1,000.00)
  • Completed Firm Application Checklist.
  • Lender’s subscription story.
  • Resumes for people submitting third party reports.
  • Description of the condition of the property, list of repairs and improvements carried out over the past two years and their estimated cost.
  • Legal description.
  • List of necessary repairs.
  • Evaluation report.
  • Phase I Environmental Site Assessment (ESA) [Phase1].
  • Operation and maintenance plan.
  • Preliminary title report.
  • Verification of zoning and code deviations.
  • Proof of public and municipal services (copies of monthly bills).
  • Historical occupancy rates.
  • Operating budget (12 months, including census composition and occupancy data).
  • Initial rental budget.
  • Articles of incorporation and by-laws of the company.

The borrower can find all of the section 223 (f) Multi-Family Acquisition and Refinancing Checklist instructions on the HUD website.

How can real estate investors use the HUD 223 (f) loan?

Because the HUD 223 (f) loan has better terms, longer amortization, and lower interest rates than traditional loan products, even those from Fannie Mae and Freddie Mac, this loan can be used in a number of ways. by knowledgeable real estate investors.

New acquisitions: Investors can simply take advantage of this loan to make a new resale acquisition as long as the loan conditions are met. Since this application process can be time consuming, a longer due diligence period may be required before the multi-family borrower enters into a transaction. Also, you may want to consider running parallel traditional apartment loan options if the HUD 223 (f) loan does not work.

Value-added projects: The loan conditions allow the substantial rehabilitation of an existing structure and still benefit from the excellent conditions of HUD 223 (f). The refinancing percentages for value-added projects are based on Criteria from the estimated value of the property after renovations are complete to:

  • 87% for projects with rent assistance of 90% or more.
  • 85% for projects that meet the definition of “affordable housing”.
  • 83.3% for projects at market rate.

Refinancing: Under the terms of the HUD 223 (f) loan, investors can cash-out refinancing. These are authorized when 80% of the value exceeds the existing debt; however, only 50% of the net cash will be released at closing. In this scenario, the remaining 50% is held in receivership until all required renovations are completed.

Affordable housing: Rental aid properties have been built for the HUD (f) loan, as it offers even better terms for houses considered affordable housing. While these HUD loans can be used for properties at market rates, they are designed for affordable property with certain rent control restrictions.

At the end of the line

The HUD loan is a lower interest rate, longer amortization loan available to investors, which is also non-recourse and assumable. This presents many unique opportunities for investors, even with the acquisition of assets that are not considered affordable housing.

While the application process can be a bit longer and more expensive, the advantages of this program certainly outweigh the disadvantages. Real estate investors can use the HUD 223 (f) loan to acquire resale multi-family assets, renovate existing assets, or refinance existing properties in their portfolios.

Make sure to speak with a experienced broker for this type of loan product. As 2021 approaches, this HUD loan is one of the savvy investors that savvy investors should consider using as a fundraising vehicle.

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