FAQs

FAQ Categories

HUD FHA 223(f) Transactions

HUD FHA 221(d)(4) New Construction and Substantial Rehabilitation Transactions

HUD FHA 223a7 Transactions

HUD FHA 232/223(f) Transactions

HUD FHA 232 Transactions

Questions & Answers

HUD FHA 223(f) Transactions

What type of entities are eligible for HUD FHA 223(f) transactions?

A single asset borrower entity is required for all multifamily FHA mortgage insurance projects.

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What are the most common types of single asset entities?

  • General Partnership (GP) with two or more general partners.
  • Limited Partnership (LP) with one or more general partners and one or more limited partners.
  • Corporation, C Corporation, or S Corporation with shareholder owners and corporate officers and directors who may or may not be shareholders.
  • Limited Liability Company (LLC) composed of members, with one or more managing members and one or more investor members.
  • Trust with beneficiaries and one or more trustees (when borrower is a trust the duration of the trust must be equal to or longer than the term on the FHA Note).
  • Nonprofit Corporation with officers and directors.
  • Any other public or private single asset borrower entity.

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What is the average time from engagement to closing on a HUD FHA 223(f) transaction?

The average time is between 4 to 6 months and varies based on the complexity of the transaction.

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What are the advantages of HUD FHA 223(f) transactions?

  • High LTV (loan-to-value) and low DSCR’s (debt-service-coverage-ratio’s)
    • 85% LTV and 1.18% minimum DSCR for Market Rate Properties
    • 87% LTV and 1.15% minimum DSCR for Affordable Properties
    • 90% LTV and 1.11% minimum DSCR for Subsidized Properties
  • Non-Recourse and fully assumable subject to both the lender and FHA approval
  • 80% LTV for cash out transactions
  • Low fixed-rate financing self-amortizing loan up to 35 years or 75% of remaining economic or useful life of the property
  • Lower debt-service coverage requirements than other loan types
  • No balloon payments and future risk of refinancing in rising interest rate environments eliminated
  • No geographical restrictions
  • Supplemental financing is available

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What are the disadvantages of HUD FHA 223(f) transactions?

  • Significant documentation requirements
  • Transaction time (usually 4-6 months)
  • Costs are higher than other transactions
  • Higher initial escrow and monthly reserves required to fund future repairs
  • Annual CPA audited financials required
  • Owner distribution restrictions limited to two times a year

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Are HUD FHA 223(f) transactions assumable?

Yes.  The loan is fully assumable with approvals from both the lender and HUD and assumption fee of 0.05% of the original loan amount.

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Is there a mortgage insurance premium (MIP) on HUD FHA 223(f) transactions?

Yes, an upfront MIP of 1% is due at closing, and an annual MIP is charged based on property type below:

  • Market rate properties 0.60%
  • Affordable and subsidized properties between 0.25 and 0.35%
  • Energy Star certified properties 0.25%

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Are there commercial space restrictions on HUD FHA 223(f) transactions?

Yes. A maximum net rental area of 25% is allowed, and a maximum of 20% of the effective gross income can be used.

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Are cash out transactions allowed on HUD FHA 223(f) transactions?

Yes, for transactions up to 80% LTV.  50% of cash will be released at closing, and the remaining 50% will be held in escrow until all required non-critical repairs are completed.  A waiver can be requested to receive 75% cash at closing with 25% held in escrow until repairs are completed.

 

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What are the occupancy requirements for HUD FHA 223(f) transactions?

The average physical occupancy cannot be less than 85%, and the occupancy must be stable for a six-month period up until the closing of the transaction.

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Are Replacement Reserves required on HUD FHA 223(f) transactions?

Initial replacement reserves of approximately $1,000 per unit are required.  An annual replacement reserve amount between $250 to $400 per unit will be determined by the Physical Capital Needs Assessment (PCNA) report.

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Do HUD FHA 223(f) transactions allow for secondary financing?

“Private secondary financing is permitted to offset mortgageable and non-mortgageable costs up to the difference between the loan-to-value percentage and a maximum combined debt of 92.5% of the FMV, except in instances when private secondary financing is combined with federal, state or local governmental agency secondary financing. (In these instances, the governmental loan, in aggregate with the HUD first and private second, may exceed the property’s FMV.)” Source HUD MAP Guide January 2016

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What Third Party Reports are required on HUD FHA 223(f) transactions?

An Appraisal, Physical Capital Needs Assessment (PCNA), and Phase I Environmental Assessment are required.

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HUD FHA 221(d)(4) New Construction and Substantial Rehabilitation Transactions

What are the advantages of the 221(d)(4) construction loan for multifamily apartments?

•    Pay interest only during construction period at the same rate of the permanent loan
•    Secure both the construction and permanent loan at the same time
•    Non-recourse

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What items should a developer have ready to provide for an analysis?

•    Prior multifamily or HUD experience of the development team members which include the borrower/developer, general contractor and management company
•    Include detailed Proforma Operating Statements with as much information as possible on number of units, unit mix, rent projections, and expense projections
•    Estimated construction costs of the project
•    Market research or market study reflecting the demand for additional units that can be quickly absorbed after construction is completed

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What 3rd party reports will be ordered by the lender?

•    Appraisal
•    Market Study
•    Environmental Site Assessment
•    Architectural Plan & Cost Review

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What is the Davis-Bacon Act and how does it apply to FHA?

The Davis-Bacon Act requires the payment of wages that prevail in the locality on projects of a character similar to the work that will be performed on direct federal contracts. The National Housing Act (§ 212) requires Davis-Bacon compliance on multifamily projects assisted with FHA mortgage insurance under Section 221(d)(4).

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Is a working capital escrow required?

Yes, a working capital escrow of 4% of loan amount is required (2% allocated to construction contingency and 2% to working capital expenses).

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What is the approximate timing for a HUD/FHA 221(d)(4) construction loan?

The timing usually takes about 6 to 8 months assuming a MAP one-stage application and about 9 to 12 months assuming a MAP two-stage application (subject to deal specifics).

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Are HUD/FHA 221(d)(4) transactions based on Loan-to-Value (LTV) or Loan-to-Cost (LTC)?

They are based on Loan-to-Cost. (LTC) is a ratio used to determine how much of a development project will be financed by debt versus equity. LTC is defined as the value of the loan divided by the cost of the project. The Loan-to-Value (LTV) is the ratio of the value of a loan to the market value of the property, as opposed to the cost of construction for a project.  LTV is the mortgage amount divided by the appraised value of the property.

Cost Driven Mortgage Limits for HUD/FHA 221 (d)(4)

Market Rate 85% Loan-to-Cost
Affordable 87% Loan-to-Cost
90% or Greater Rental Assistance 90% Loan-to-Cost

 

*Note: Loan amounts in excess of $75MM have higher Debt Service Coverage Ratio (DSCR) limits and decreased Loan-to-Value (LTV) limits.

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Can market rate properties qualify for a FHA/HUD 221(d)(4) construction loan?

Yes. Many class A and B market rate multifamily apartment developments qualify. HUD is known for providing programs that provide financing programs for Section 8, affordable housing, and elderly and disabled, many of their programs can be taken advantage without these components.

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Are there any restrictions on cash distributions?

Yes. Cash flow distribution allowed up to two times per year upon HUD approval of audit. Submission of annual audited financial statements is required.

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Are HUD FHA 221(d)(4) transactions assumable?

Yes. The loan is fully assumable with approvals from both the lender and HUD and assumption fee of 0.05% of the original loan amount.

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What type of monthly escrows are required?

Monthly escrows are required for property insurance, real estate taxes, reserves for replacement and mortgage insurance premiums.

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Are there any commercial space and income limitations?

Yes. The maximum allowable percentage of total net rentable area is 25%, and the maximum allowable percentage of effective gross income is 15%.

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What are a few important factors that HUD considers in their pre-application review?

•    That there is demand for the units proposed and there is not an oversupply in the current proposed market, as well as other proposed units coming online.
•    Environmental remediation at the site that there is removal of pollution or contaminants from environmental media such as soil, groundwater, sediment, or surface water.

 

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What are the requirements to meet to qualify for substantial rehabilitation?

The repairs, replacements, and improvement costs for an existing multifamily apartment property must be more than:

  • 15% of the property’s replacement cost after of all work is completed OR
  • Renovation costs of more than $15,000 per unit as adjusted by the local HUD office OR
  • The cost of replacing two or more buildings, regardless of the cost

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What Third Party reports are required?

  • Appraisal
  • Market Study
  • Environmental Report
  • Projected Capital Needs Assessment

A review of the architectural documents and final construction by a HUD approved third party contractor is also needed.

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HUD FHA 223a7 Transactions

What properties are eligible?

Multifamily and Healthcare properties with current FHA insured loans.

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Are repairs and improvements eligible for this program?

Yes. Minor repairs are allowed not to exceed $1,500 per unit.  If the Physical Capital Needs Assessment (PCNA) report reflects required repairs over $1,500 per unit, you would not be eligible for this particular program.

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What are the minimum Debt Service Coverage Ratios (DSCR) to qualify for both for profit and non-profit entities?

1.11x minimum DSCR For-profit entities

1.05x minimum DSCR Non-profit entities

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Do I need an appraisal for a HUD/FHA 223(a)(7) transaction?

No appraisal is required.  The only 3rd party report that is required is the Physical Capital Needs Assessment (PCNA) report if one has not been completed within the last 5 years.

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What is the maximum loan term available?

Maximum loan term is the remaining term on the existing mortgage. Can be increased up to 12 years beyond the remaining term of the existing mortgage, but not to exceed the original term. Cannot exceed 75% of the project’s remaining economic life.

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What is the maximum loan size?

The Lesser of:

  • Original principal amount of existing insured mortgage;
  • DSC of 1.11x (1.05x for non-profit borrowers);
  • 100% of eligible transaction costs, including existing indebtedness, repairs, fees, third party costs and initial reserve deposit.

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Can I withdraw overfunded replacement reserve account escrow account of my current loan?

No.  The entire balance of the current replacement for reserve escrow account is transferred to the new HUD/FHA 223(a)(7) loan.

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How long does the loan process take to complete?

The transaction time from Engagement to close normally takes between 60 and 90 days.

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HUD FHA 232/223(f) Transactions

What are the standard loan amounts for both refinancing and acquisition?

For REFINANCING, the lesser of:

  • 80% of fair market value (85% for non-profits)
  • 100% of FHA’s allowable transaction costs (no equity take-out)
  • 100% of FHA’s allowable costs less grants, public loans, and tax credits
  • Amount that results in a debt service coverage ratio of 1.45x based on the underwritten Net Operating Income

For ACQUISITION, the lesser of:

  • 85% of FHA’s allowable acquisition costs (90% for non-profits)
  • 100% of FHA’s allowable costs less grants, public loans, and tax credits
  • 80% of fair market value (85% for non-profits)
  • Amount that results in a debt service coverage ratio of 1.45x based on the underwritten Net Operating Income

View Infographic

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Are Replacement Reserves required?

Yes. Annual deposits are required based on estimates determined by a third-party Project Capital Needs Assessment. An initial deposit to the replacement reserve will be required at closing and can be funded by the mortgage loan.

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Is secondary financing allowed?

Secondary financing is allowed in the form of a surplus cash note. Combined loan to value cannot exceed 92.5% unless secondary financing is from a governmental source.

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How much in repairs are eligible for this program?

Up to 15% of the appraised value of the property after completion of repairs, as long as no more than one building system is substantially renovated or replaced.

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What is the maximum loan term?

The maximum loan term is 35 years or 75% of the remaining economic life of the property.

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What Third Party reports are required?

  • Appraisal
  • Phase I Environmental report
  • Project Capital Needs Assessment (PCNA)

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HUD FHA 232 Transactions

What properties are eligible?

Section 232 provides construction loans for assisted living facilities, skilled nursing, and intermediate and memory care properties meeting the following requirements:

  • Must provide continuous care
  • Must offer three meals per day
  • Facility must be licensed by appropriate government entity
  • Non-resident day care not to exceed 20% of gross area and 20% of gross income
  • May include up to 25% non-licensed independent living units
  • 20 bed minimum
  • Operating leases to qualified facility operators are permissible, subject to HUD approval
  • Major movable equipment, day-care facilities, and fire safety equipment may be financed
  • If a state has a Certificate of Need program, a CON must be obtained prior to filing for Pre-Application

View Infographic

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Will HUD consider non-profit entities for the Section 232 program?

Yes.

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Are there any special underwriting considerations for lower acuity Assisted Living Facilities?

If the units serve those needing assistance with at least 3 Activities of Daily Living (ADL) and meet the other ALF requirements (e.g. licensed) they are eligible under Section 232.  If they are independent, you would need to limit to 25% of total number of units or request a waiver of the 25% rule (for up to 30%). 

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Does the 25% limitation on Independent Living refer to 25% of units or 25% of residents?

The limitation on Independent Living refers to 25% of units.

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Does a property need to be eligible per the 3-year rule at the time of submission of the application, or would HUD accept an application submitted a few months in advance of the 3-year eligibility date?

Yes. The facility must have been completed or substantially rehabilitated for at least three years prior to the date of the Firm Commitment application. Projects with additions completed less than 3 years previous are eligible as long as the addition was not larger than the original project in size and number of beds.

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What are the maximum Loan to Values (LTV) and minimum Debt Service Coverage Ratios (DSCR) required by HUD for Skilled Nursing facilities (SNF), Assisted Living (ALF) and Independent Care Facilities (ILU)?

OHP Benchmarks for each facility type are below, with the LTV presented first (in percentage) and the DSCR presented after the LTV for each type:

  • SNF/ILU Both for Profit 80% LTV 1.45 DSCR
     
  • SNF/ILU Both Non-Profit 85% LTV 1.45 DSCR
     
  • ALF New for Profit 75% LTV 1.45 DSCR
     
  • ALF New Non-Profit 80% LTV 1.45 DSCR
     
  • ALF Existing for Profit 80% LTV 1.45 DSCR
     
  • ALF Existing Non-Profit 85% LTV 1.45 DSCR

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What escrows are required?

  • Taxes and Insurance escrowed monthly (post construction)
  • Replacement reserves required in accordance with HUD guidelines;
  • Working Capital Reserve equal to 2% of loan amount (post in cash or LOC)
  • Typically, equal to 12-18 months of debt service and released upon property maintaining 1.45x debt service coverage for 3 consecutive months
  • Debt service reserve is required and ranges from 6-12 months of principal, interest and MIP payments; will be held until an average debt service coverage of 1.45x is met for 12 consecutive months (no month can be below 1.25x).

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Is debt used for developer fees mortgageable?

Developer’s Fees are not eligible mortgageable costs. However, costs associated with development of the project are allowed to be repaid through a surplus cash note. Justification to support what is included in the developer’s fee, including evidence that the work was specifically related to the project, is required if a surplus cash note is used.

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What is the timing of the transaction from Engagement to closing?

Under the LEAN process this transaction can typically be completed in 9 to 12 months. Actual processing times vary depending on the complexity of the project and information available from the borrower.

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