HUD 223(a)(7) Terms, Qualification & Guidelines
According to HUD, Section 223(a)(7) exists to “facilitate the refinancing of certain mortgages currently insured by FHA and to HUD-held loans on projects subject to the Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA).” Below are the terms, qualifications, and guidelines for the HUD 223(a)(7) multifamily refinancing product. Keep reading below to learn about HUD 223(a)(7) loans, or click here to download our easy-to-understand HUD 223(a)(7 loan term sheet.
FHA-insured multifamily and healthcare properties with existing HUD mortgages of all types are eligible - market-rate, mixed-income, subsidized, and affordable properties.
For-profit or non-profit, single asset, single-purpose entities are all eligible.
No minimum or maximum.
HUD 223(a)(7) multifamily refinancing is a non-recourse loan with the exception of standard carve-outs.
Fixed for the life of the loan. The specific rate is based on prevailing market conditions at the time of rate lock.
Borrowers can refinance for the remaining term of the existing mortgage. HUD generally allows 12 additional years of financing if the additional time will ensure the project’s economic viability.
These loans are fully assumable with HUD approval.
HUD allows prepayment with a zero or one-year lockout period followed by declining prepayment for a 10-year step-down (10% down to 1%).
Maximum Loan Size
HUD 223(a)(7) multifamily refinancing for existing FHA-insured loans are based on the lesser of the following:
The principal balance of the existing loan.
100% of the eligible refinancing costs including existing debt, fees, repairs, third-party costs, and any initial reserve deposits.
A minimum Debt Service Coverage Ratio (DSCR) of:
1.11x for for-profit borrowers OR
1.05x for non-profit borrowers (projects with >90% of project-based Section 8 units and cooperative housing insured under HUD Section 213).
Generally, cash out is not allowed. However, additional funds may be allowed to cover costs such as repairs and improvements along with transaction and closing costs. In addition, outstanding debt incurred which stems from capital improvements to the property could be allowed (subject to HUD approval).
Cash Flow Distribution
HUD allows cash flow distribution up to twice annually (per HUD approval of audit).
The FHA requires cash at closing for costs not covered by the updated mortgage amount.
HUD Application Fee
0.30% of the mortgage total is paid when submitting the application. Half of this is mortgageable while the other half is credited back at closing
Additional Fees, Deposits, & Expenses
In addition to the HUD Application Fee, borrowers may also need to pay other fees related to the loan, including lender fees. These fees may be included in the loan amount.
Rate Lock Deposit - A deposit of up to 1.0% of loan amount secures a rate lock. This deposit is refunded when a GNMA investor accepts the loan.
Inspection Fees - HUD does not require inspection fees.
Finance Fee - Up to 2.0% for loans over $2 million (due at closing).
Placement Fee - Up to $40,000 for loans less than $2 million (due at closing).
Third Party Reports
In general, HUD requires a PCNA (Project Capital Needs Assessment) to apply for Section 223(a)(7) financing. On top of that, A PCNA is required every 10 years after the initial application. HUD does not require new appraisals, market studies, or environmental assessments.
Initial reserves and monthly deposits are required based on the project’s needs.
Mortgage Insurance Premium (MIP)
HUD 223(a)(7) multifamily refinancing requires the following MIP:
1.0% (up-front cost - due at closing)
0.25% annually of the loan total for
90%+ LIHTC properties and/or
90%+ Section 8 properties or
Green certified properties
0.35% annually of the loan total for affordable properties (10%-90%)
0.50% annually of the loan for Market rate properties
0.55% annually of the loan total for healthcare properties
FHA 223(a)(7) refinancing of FHA-insured mortgages requires minimal underwriting by the sponsor.
HUD 223(a)(7) refinancing usually takes 60 days. However, it could take as long as 3 months. The actual time to process a loan depends on the specific transaction. For instance,
the firm application is typically submitted to HUD within 30 days. For multifamily properties, HUD has an estimated 45-day review period. For healthcare, it is an estimated 60 days. After HUD issues the firm commitment and rate lock, most FHA 223(a)(7) refinancing loans close in an average of 45 days.
Funds for minor repairs and improvements can be included in the refinancing cost. HUD allows up to $1,500 per unit.
Not required for HUD 223(a)(7) refinancing.
HUD requires annual audited financial statements.