HUD 223(F) REFINANCE LOAN INTRODUCTION
The HUD 223(f) program for refinancing provides a non-recourse, fully amortizing, fixed rate assumable mortgage. Program eligibility requirements include fully-stabilized properties, both market rate and affordable. For properties in need of immediate maintenance and upgrades, the 223(f) program also allows for up to $50,000 per unit in repairs/improvements, offering borrowers an opportunity to perform necessary work on the property
Loan Amount
The HUD loan amount will be limited to the lowest of the following criterion:
1. Amount based on Value after the completion of repairs and improvements:
• 85% LTV—Market Rate Properties
• 87% LTV—Affordable Properties per HUD definition
• 90% LTV—For projects with greater than 90% rental assistance for tenants
2. Amount based on Limitations per Family Unit
3. Amount based on Debt Service Coverage:
• 1.176x for market rate projects
• 1.15x for affordable properties, per HUD definition.
• 1.11x for projects with greater than 90% rental assistance
4. Amount based on the greater of 80% LTV or the cost to refinance
Interest Rate
The interest rate can be locked upon HUD’s issuance of a Firm Commitment. The lender will work with GNMA investors to provide the borrower with the current market interest rate. The interest rate is locked for the entire term of the 35-year permanent mortgage. Standard timing of rate lock is upon HUD’s issuance of the Firm Commitment. Berkadia does offer Early Rate Lock (ERL) opportunities for select properties.
Pre-Payment Period
The standard pre-payment penalty typically offered by GNMA investors is set for the initial 10 years of the permanent mortgage. The most common structure declines 1% per year beginning at 10% in the first year.
Alterations to this pre-payment structure can be negotiated with the GNMA investor based on the borrower’s needs. Any approved pre-payment penalty changes may have an impact on the market interest rate.
Rate Reset
Post Final Endorsement, if interest rates lower, there are options that allow the borrower to lower the interest rate of the 223(f) loan. This can be accomplished through an Interest Rate Reduction (IRR), or via the HUD 223(a)(7) program. Based upon the interest rate at the time and what the current pre-payment penalty is for the loan, the lender will present both options to the borrower and discuss if either is a viable and/or recommendable option at that time.
Mortgage Insurance Premium
HUD requires a Mortgage Insurance Premium (MIP) to be paid throughout the life of the mortgage. For HUD 223(f) Market Rate loans, the MIP is 0.60%. This amount is reduced to 0.25% for Market Rate properties achieving a HUD approved Green Building Certification. Additionally, for properties achieving 90% or greater rental assistance, the MIP is also 0.25%, and for any properties with a unit mix meeting HUD’s affordability definition MIP is 0.35%.
Third Party Reports
HUD requires certain third party reports on every 223(f) transaction. Those reports are a full property appraisal, a Phase I environmental site assessment (ESA), a project capital needs assessment (PCNA), and clearance in the HUD Environmental Review Online System (HEROS). Depending on various factors, such as the property’s location, surroundings, and age, several other reports may be required, including, but not limited to, a seismic report, soil testing, and testing for hazardous materials such as radon gas, asbestos containing materials (ACM), and lead based paint (LBP).
Green MIP
Properties that meet HUD’s green standards and reporting requirements qualify for a decrease in upfront MIPs from 1.00% to 0.25%, and monthly MIPs over the life of the loan from 0.60% to 0.25%. Owners of property must obtain one of HUD’s approved green building certifications, which include National Green Building Standard (NGBS), LEED, Greenpoint, Earthcraft, and Enterprise.
Cash-out/Equity from Loan Proceeds
The maximum loan-to-value ratio for cash-out refinances is 80%. For cash-out refinances, the lender must withhold fifty percent (50%) of the cash-out proceeds in a dedicated account until all repairs are completed. When the sum of cash held back from cash-out proceeds exceeds $1,000,000, HUD will allow Regional/Satellite Offices the discretion to reduce the holdback amount when the following criteria are satisfied:
1. The noncritical repairs are minimal;
2. The owner has demonstrated both the ability to complete repairs in a timely manner and a commitment to keeping the property in good repair with no deferred maintenance; and
3. That any reduction in the holdback below the $1,000,000 represents no risk to HUD.
Critical & Non-Critical Repairs
Critical repairs include Life Safety & Accessibility repairs and are not deferred. They must be completed before Initial/Final Endorsement and Closing. Critical repairs are not subject to cash-out or withholding of proceeds. A HUD site visit (inspection) and Joint Inspection Report Capital Needs Assessment is required to confirm satisfactory completion before closing. Accessibility repairs that exceed twelve months based on the complexity of the repair require a corrective action plan approved by HUD headquarters.
Non-critical repairs may be considered for deferred completion after closing at the request of the mortgagor upon delivery of:
1. Schedule of Values for payment of completed repairs;
2. A progress schedule ensuring that repairs begin immediately upon closing are completed within 12 months of loan closing;
3. Schedule of Delayed or Interrupted occupancy/income with a Projected completion date;
• When applicable an additional deposit (determined by HUD) to an operating deficit account to cover any shortfall as a result of interruption cause by non-critical repairs.
4. Temporary Resident Relocation Schedule, when required.
Deposits
to Replacement Reserve
Annual and Initial deposits to the Reserve for Replacement (R4R) accounts are estimated using the replacement schedule from the Capital Needs Assessment and/or Physical Inspection Report to determine the remaining useful life of building components.
Distribution of Surplus Cash
HUD has updated their policy on surplus cash distributions so that any loan that is endorsed after Sept. 7th, 2022 can elect for Monthly Cash Distributions. Borrowers who choose to decline this election will be eligible for semi-annual distributions. Newly endorsed 223(f) properties will require one fiscal year of seasoning prior to permitting monthly distributions, unless the Borrower or Active Principals have owned at least two FHA insured projects for the prior five fiscal years and have no regulatory violations. The Borrower will still be eligible for semi-annual distributions during this seasoning period. Furthermore, to qualify for monthly distributions, the project’s most recent REAC inspection score must be 80 or above with no REAC inspection scores below 60 for the three preceding fiscal years.
Annual Audits and Reporting
• For Projects with Green MIP: Statement of Energy Performance (SEP) are due to HUD by March 31st each year
• Yearly Audited Financial Statements by Licensed CPA
• Evidence of Insurance
• Mortgage Status
• HUD Annual REAC Inspection
• Replacement Reserves & Escrow accounts
• PCNA Required every 10 years
