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.

Eligible Properties

FHA-insured multifamily and healthcare properties with existing HUD mortgages of all types are eligible - market-rate, mixed-income, subsidized, and affordable properties.

Eligible Borrowers

For-profit or non-profit, single asset, single-purpose entities are all eligible.

Eligible Locations

Nationwide.

Loan Amount

No minimum or maximum.

Guarantees

HUD 223(a)(7) multifamily refinancing is a non-recourse loan with the exception of standard carve-outs.

Interest Rate

Fixed for the life of the loan. The specific rate is based on prevailing market conditions at the time of rate lock.

Maximum Term/Amortization

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.

Assumable

These loans are fully assumable with HUD approval.

Prepayment

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).

Cash Out

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).

Mortgage Conditions

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.

Replacement Reserves

Initial reserves and monthly deposits are required based on the project’s needs.

Escrows

HUD requires monthly escrows of real estate taxes, property insurance, the initial deposit for replacement reserves, MIP (mortgage insurance premiums), and 10% of noncritical work.

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

Sponsor Requirements

FHA 223(a)(7) refinancing of FHA-insured mortgages requires minimal underwriting by the sponsor.

Timing

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.

Repair Amount

Funds for minor repairs and improvements can be included in the refinancing cost. HUD allows up to $1,500 per unit.

Davis-Bacon Wages

Not required for HUD 223(a)(7) refinancing.

Post-Closing Reporting

HUD requires annual audited financial statements.

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Do HUD 223(a)(7) Loans Allow Prepayment?
Do HUD 223(a)(7) Loans Allow Prepayment?

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.

Are HUD 223(a)(7) Loans Assumable?
Are HUD 223(a)(7) Loans Assumable?

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.

What are the Terms and Amortization for the HUD 223(a)(7) Refinance Program?
What are the Terms and Amortization for the HUD 223(a)(7) Refinance Program?

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.

Do HUD 223(a)(7) Permit Cash Out?
Do HUD 223(a)(7) Permit Cash Out?

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.

What is the Maximum Loan Amount for HUD 223(a)(7) Loans?
What is the Maximum Loan Amount for HUD 223(a)(7) Loans?

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.

What Types of Properties are Eligible for the HUD 223(a)(7) Loan?
What Types of Properties are Eligible for the HUD 223(a)(7) Loan?

Multifamily and healthcare properties with existing HUD-insured debt are eligible for the HUD 223(a)(7) refinance loan program.

How Long Does it Take a HUD 223(a)(7) Loan to Close?
How Long Does it Take a HUD 223(a)(7) Loan to Close?

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.

What are the Fees for HUD 223(a)(7) Loans?
What are the Fees for HUD 223(a)(7) Loans?

HUD 223(a)(7) loans require a HUD application fee (0.3% of the loan amount) which is due at application. Half of this is refunded after closing. Other fees and costs for the HUD 223(a)(7) program are usually capped at 2.0%.

How Difficult is the Approval Process for HUD 223a7 Loans?
How Difficult is the Approval Process for HUD 223a7 Loans?

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).

What are the Major Benefits of the HUD 223(a)(7) Loan Program?
What are the Major Benefits of the HUD 223(a)(7) Loan Program?

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.