Prepayment occurs when a borrower pays off a mortgage balance before maturity (the end of the loan term). The FHA requires prior approval for the prepayment of HUD multifamily loans. In most cases, HUD multifamily loans require a prepayment penalty, which reimburses the lender if the borrower attempts to pay off the loan early. Most HUD multifamily loans have a two-year lockout (a period in which the borrower cannot repay the loan at all), followed by an 8-1% declining prepayment penalty.
For example, if a borrower wanted to prepay the loan in the third year, they would face an 8% penalty, in the fourth year, a 7% penalty, and after the tenth year, they could prepay the loan with no penalty at all. If a HUD multifamily borrower wants to refinance their loan with the HUD 223(a)(7) program before the end of the penalty period, they can roll that penalty into the cost of their new 223(a)(7) loan.