Do HUD 223(f) Loans Have Prepayment Penalties?
Like many types of multifamily financing, HUD 223(f) loans typically have prepayment penalties-- fees that are charged to the borrower if they attempt to pay off the loan early. HUD 223(f) prepayment penalties are negotiable, and can vary by lender, but often include a 0-2 year lockout
HUD 223(f) Loans and Prepayment Penalties
Like many types of multifamily financing, HUD 223(f) loans typically have prepayment penalties. These are fees that are charged to the borrower if they attempt to pay off the loan early. HUD 223(f) prepayment penalties are negotiable and can vary by lender. They often include a 0-2 year lockout, followed by a 8-10% to 1% declining prepayment penalty. This means that during the first 0-2 years of the loan, the borrower will be unable to prepay it at all. But, after that period, they can prepay it with a penalty starting at 8-10% of the entire loan amount in the first, year, declining by 1% each year until it reaches 0%, typically around the 10th year.
For example, if a borrower tried to pay back a loan with a 1-year lockout and a 8-1% declining prepayment penalty in the fourth year of the loan, they would most likely be paying a 6% prepayment penalty.
Why do Prepayment Penalties Exist?
When a lender issues a loan, they expect to get a specific amount of interest revenue over a specific amount of time. So, if a borrower wants to pay the loan back sooner than expected, it could put the lender in a tough spot. Prepayment penalties compensate the lender for their lost revenue, and usually become less severe as time goes on.
If a HUD 223(f) Loan is Assumed, Does the Original Borrower Have to Pay a Prepayment Penalty?
No. If a HUD 223(f) loan is assumed by a new borrower, the prepayment penalty is waived. This is because the lender can still count on the interest revenue from the new borrower, so they won't be experiencing any financial losses.
TO LEARN MORE ABOUT FHA 223F LOANS, FILL OUT THE FORM BELOW AND A HUD LENDING EXPERT WILL GET IN TOUCH.
{"@context":"https://schema.org","@type":"FAQPage","mainEntity":[{"@type":"Question","name":"Do HUD 223(f) Loans Have Prepayment Penalties?","acceptedAnswer":{"@type":"Answer","text":"Like many types of multifamily financing, HUD 223(f) loans typically have prepayment penalties. These are fees that are charged to the borrower if they attempt to pay off the loan early. HUD 223(f) prepayment penalties are negotiable and can vary by lender. They often include a 0-2 year lockout, followed by a 8-10% to 1% declining prepayment penalty. This means that during the first 0-2 years of the loan, the borrower will be unable to prepay the loan at all. But, after that period, they can prepay it with a penalty starting at 8-10% of the entire loan amount in the first year, declining by 1% each year until it reaches 0%, typically around the 10th year."}},{"@type":"Question","name":"WHY DO PREPAYMENT PENALTIES EXIST?","acceptedAnswer":{"@type":"Answer","text":"When a lender issues a loan, they expect to get a specific amount of interest revenue over a specific amount of time. So, if a borrower wants to pay the loan back sooner than expected, it could put the lender in a tough spot. Prepayment penalties compensate the lender for their lost revenue and usually become less severe as time goes on."}},{"@type":"Question","name":"IF A HUD 223(F) LOAN IS ASSUMED, DOES THE ORIGINAL BORROWER HAVE TO PAY A PREPAYMENT PENALTY?","acceptedAnswer":{"@type":"Answer","text":"No. If a HUD 223(f) loan is assumed by a new borrower, the prepayment penalty is waived. This is because the lender can still count on the interest revenue from the new borrower, so they won't be experiencing any financial losses."}}]}
Related Questions
What is a HUD 223(f) loan?
A HUD 223(f) loan is a loan specifically designed to finance the acquisition or refinancing of existing multifamily properties. Loan terms are typically far more favorable than conventional loans, with fully amortizing terms of up to 35 years. The HUD 223(f) loan program also allows for more flexible underwriting guidelines and lower mortgage insurance premium than other government-insured loan programs. These loans can be used for both market-rate and affordable housing properties, making it a great option for a wide range of investors.
Sources:
What are the benefits of a HUD 223(f) loan?
HUD 223(f) loans offer some of the best terms in the industry for the acquisition and refinancing of multifamily and apartment properties. These loans are non-recourse, offer high leverage, low interest rates, and lenient DSCR requirements.
The terms of HUD 223(f) loans are as follows:
Loan amount Terms Leverage Interest rates DSCR requirements $1 million, no set maximum Between 10 and 35 years Up to 85% LTV for market-rate properties, 87% LTV for affordable properties, 90% LTV for properties using rental assistance. Fixed for the life of the loan. Includes a mortgage insurance premium, or MIP. 1.18x for market-rate properties, 1.15x for affordable properties, and 1.11x for rental assistance properties. In addition, HUD 232/223(f) loans offer the following advantages:
- Low, fixed interest rates
- Loans are fully assumable (with FHA/HUD approval)
- HUD 232/223(f) loans are non-recourse, limiting risks for developers
What are the requirements for a HUD 223(f) loan?
HUD 223(f) loans have terms including:
- Loan Amount: Minimum loan amount of $1 million (exceptions can be made on a case by case basis)
- Loan Term: Minimum loan term of 10 years, and a maximum term of 35 years (or 75% of the property's remaining economic life)
- Leverage:
- Market rate properties: 83.3% LTV
- Affordable properties: 85% LTV
- Rental assistance properties: 87% LTV, 90% LTV for properties with 90% or more rental assistance
- Interest Rates: Fixed, terms range from 4.10% to 4.75% (including MIP), as of Jan. 2019
- DSCR:
- Market rate properties: 1.17x minimum DSCR
- Affordable properties: 1.15x minimum DSCR
- Rental assistance properties: 1.11x minimum DSCR
- MIP: 1% upfront mortgage insurance premium for all property types, then, annual MIP of:
- 0.65% for market rate properties
- 0.45% for affordable properties (typically must be Section 8 or new money LIHTC projects to qualify)
- 0.25% for Energy Star SEDI (Statement of Design Intent) certified properties
- FHA Application Fee: 0.30% of the total loan amount
- Cash Out: For 223f refinances, cash out is allowed under specific conditions. LTV must be at least 80% (including transaction costs in the loan amount). At that point, 50% of funds above 80% adjusted LTV are released, with the remaining 50% to be released after property rehab is complete.
- Repair Limitations: While the 223(f) program is not intended for substantial rehabilitation, loan funds may be used for repairs of up to $6,500/unit (more in high-cost areas), or 15% of the property value, or 20% of the mortgage. If the second or third calculation is used, repairs are limited to $15,000/unit (more in high-cost areas). No more than half of any essential structural component (e.g. roofing, HVAC) may be replaced.
In addition, properties being acquired or refinanced with a HUD 223(f) loan must:
- Be at least three years old (for new properties), or have had the last substantial renovation three years ago or more
What are the terms of a HUD 223(f) loan?
HUD 223(f) loans have terms including:
- Loan Amount: Minimum loan amount of $1 million (exceptions can be made on a case by case basis)
- Loan Term: Minimum loan term of 10 years, and a maximum term of 35 years (or 75% of the property's remaining economic life)
- Leverage:
- Market rate properties: 83.3% LTV
- Affordable properties: 85% LTV
- Rental assistance properties: 87% LTV, 90% LTV for properties with 90% or more rental assistance
- Interest Rates: Fixed, terms range from 4.10% to 4.75% (including MIP), as of Jan. 2019
- DSCR:
- Market rate properties: 1.17x minimum DSCR
- Affordable properties: 1.15x minimum DSCR
- Rental assistance properties: 1.11x minimum DSCR
- MIP: 1% upfront mortgage insurance premium for all property types, then, annual MIP of:
- 0.65% for market rate properties
- 0.45% for affordable properties (typically must be Section 8 or new money LIHTC projects to qualify)
- 0.25% for Energy Star SEDI (Statement of Design Intent) certified properties
- FHA Application Fee: 0.30% of the total loan amount
- Cash Out: For 223f refinances, cash out is allowed under specific conditions. LTV must be at least 80% (including transaction costs in the loan amount). At that point, 50% of funds above 80% adjusted LTV are released, with the remaining 50% to be released after property rehab is complete.
- Repair Limitations: While the 223(f) program is not intended for substantial rehabilitation, loan funds may be used for repairs of up to $6,500/unit (more in high-cost areas), or 15% of the property value, or 20% of the mortgage. If the second or third calculation is used, repairs are limited to $15,000/unit (more in high-cost areas). No more than half of any essential structural component (e.g. roofing, HVAC) may be replaced.
In addition, properties being acquired or refinanced with a HUD 223(f) loan must:
- Be at least three years old (for new properties), or have had the last substantial renovation three years ago or more (for renovated properties)
- Owner/developer must place funds monthly in a replacement reserve account
- Must comply with HUD's environmental review requirements
Does a HUD 223(f) loan have a prepayment penalty?
Yes, like many types of multifamily financing, HUD 223(f) loans typically have prepayment penalties. These are fees that are charged to the borrower if they attempt to pay off the loan early. HUD 223(f) prepayment penalties are negotiable and can vary by lender. They often include a 0-2 year lockout, followed by a 8-10% to 1% declining prepayment penalty. This means that during the first 0-2 years of the loan, the borrower will be unable to prepay the loan at all. But, after that period, they can prepay it with a penalty starting at 8-10% of the entire loan amount in the first year, declining by 1% each year until it reaches 0%, typically around the 10th year. Source