Yes, HUD 223(a)(7) loans typically allow prepayment. However, there is often a 0-2 year lockout period, during which the loan cannot be prepaid at all, followed by an 8-10% declining prepayment penalty. This means that the prepayment penalty will decline by 1% each year, starting after the lockout period ends.
Just like other HUD multifamily loans, HUD 223(a)(7) loans are fully assumable subject to FHA approval and a fee of 0.05% of the original FHA-insured loan amount. The fact that these loans are assumable can be a significant benefit to borrowers; especially those who want to sell their property after a few years. This is because having a new borrower assume the loan prevents the previous borrower from having to pay a prepayment penalty.
When refinancing with the HUD 223(a)(7) loan, the existing loan term may be extended by up to 12 years. At the same time, the new term cannot exceed the initial loan term.
In general, the HUD 223(a)(7) loan program does not allow for cash out refinancing. Instead, the 223(a)(7) loan can only finance certain eligible costs, including 100% of the property’s existing mortgage, third-party reports, minor/moderate property repairs, replacement reserves, prepayment penalties (if the borrower is paying off their HUD multifamily loan early), and certain other costs. Borrowers who wish to get cash out from a multifamily property may wish to look towards other types of financing, such as a CMBS loan.
HUD 223(a)(7) loans cannot exceed 100% of eligible refinancing costs. These include the principal amount of existing debt (the existing loan balance), fees, repairs, third-party costs, and initial reserve deposits. A minimum Debt Service Coverage Ratio (DSCR) is required - 1.11x for for-profit borrowers or 1.05x for non-profit borrowers.
Multifamily and healthcare properties with existing HUD-insured debt are eligible for the HUD 223(a)(7) refinance loan program.
Because there are fewer requirements for the HUD 223(a)(7) refinance program, these loans typically close about 60 days after the application is submitted.
Without a doubt, the HUD 223(a)(7) loan process is faster and has fewer hoops than other FHA/HUD products. The streamlined, affordable process does not require new third-party reports like appraisals, market studies, or environmental reports. In fact, most 223(a)(7) refinances only require a project capital needs assessment (PCNA).
The HUD 223(a)(7) refinance loan program can reduce interest rates, increase amortization, and improve cash flow while reducing the cost of debt service. It can even absorb prepayment penalty costs. On top of all that, it is one of the fastest, easiest, and most affordable multifamily or healthcare loans that you can get.
No, HUD’s 223(a)(7) refinance loan is used exclusively to refinance existing HUD-insured loans on multifamily and healthcare properties. It is reserved for those with existing loans like the 223(f), 221(d)(4), HUD 232 and other FHA-insured multifamily and healthcare loans. Unlike most other HUD multifamily loan programs, the HUD 223(a)(7) loan requires very little underwriting, only one third-party report (a PCNA, or project capital needs assessment), and can close in as little as 60 days.
HUD 223(a)(7) multifamily refinancing has several advantages and disadvantages. While they provide an incredibly streamlined application and approval process, are non-recourse, and fully assumable, they are only available to current HUD multifamily loan borrowers, and do not permit borrowers to take cash out.