Whether you are looking to acquire a new multifamily property, or the current loan on an already owned multifamily apartment is maturing in the next few years, HUD FHA 223(f) financing may be a great option.
There are several advantages that the HUD FHA 223(f) loan has over other loan programs. The program offers a low interest, 35-year fixed rate that is fully amortized. This product eliminates interest rate risk, and provides borrowers the peace of mind that they will not have to refinance at a higher rate in order to pay off an existing product with a balloon payment due at the end of a short-term fixed rate loan that is amortized over 30 years. Many clients like the benefits of knowing that interest rate risk is eliminated and they can better predict future cash flows without having to factor in the possible risks of higher interest costs.
These transactions are non-recourse, and fully assumable upon lender and HUD approval. These transactions also benefit both short and long-term investors. If you plan on selling the property and the existing FHA HUD loan has a lower rate than market, it makes the transaction more appealing. The DSCR (Debt Service Coverage Ratio) is 1.176%, which is significantly lower than many bank loans that require a DSCR of 1.25% or higher. This product allows for up to 80% for cash out, 85% non-cash out, and up to 90% for affordable transactions. A disadvantage of this program is that the transaction can take between 4 to 7 months depending on the complexity, while agency and other loans can be completed in 2 to 3 months. There is also more paperwork that is required and the third-party reports are more expensive. A Mortgage Insurance Premium (MIP) is required, but the (MIP) is multiplied by the reduced outstanding principal balance every 12 months. There are a few others that will be identified in the section below.
Advantages for a HUD 223(f) FHA Transaction
- Up to a 35-year fixed-rate, fully amortizing loan (eliminates interest rate risk)
- Lowest long term fixed-rate of any multifamily loan program available
- Assumable mortgage
- LTV’s 5% to 10% higher than other programs (highest LTV% in the marketplace)
- 10-year step down pre-payment that can be customized
- Minimum DSCR (Debt Service Coverage Ratio) of 1.176%
- No balloon payments, no yield maintenance, or defeasance
Disadvantages for a HUD 223(f) FHA Transaction
- Higher initial replacement reserves required (estimated $1,000 per unit)
- Expensive approval process (higher HUD and FHA fees add to the cost of the loan)
- MIP (Mortgage Insurance Premium) required
- HUD property inspections required
- More paperwork and longer time from start to close than other transactions
- Annual financial statement audits by CPA are required
- Semi-annual cash distributions to ownership
The advantages of a HUD 223(f) transaction far outweigh the disadvantages. Over the last 5 years HUD has streamlined their underwriting processes and have consolidated their offices which has increased their efficiency and time to approve transactions. LSG Lending Advisors will be there every step of the way to help navigate and guide you through the process. We have the experience to size your transaction and provide you with a detailed proposal of terms and costs for you to make an informed decision.