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Looking at HUD’s New Financing Opportunity for Multifamily Investors

HUD has permanently relaxed its three-year rule for Section 223(f) mortgage refinancing applications.

On March 2nd, HUD relaxed its three-year rule for Section 223(f) refinancing mortgage loan applications.

The three-year rule required that properties be seasoned for three years from certificate of occupancy before being eligible for a HUD 223(f) mortgage loan application. HUD temporarily waived this rule during the recession from 2009 to 2013, but has now permanently changed the rule. Section 223(f) insures mortgage loans for the purchase or refinancing of existing multifamily properties.

We will need to see if HUD’s 2020 multifamily accelerated processing (MAP) guide affirms the approach. In the meantime, the just released Mortgagee Letter states that multifamily real estate investors now have the ability to apply for long-term HUD financing for multifamily properties without having to wait three years for the property to season. Under the relaxed rule, HUD offers borrowers the ability to secure permanent, non-recourse fixed rate debt at low interest rates.

To qualify for the long-term mortgage, the borrower’s multifamily project will need to be fully leased. The project will need to have sustained occupancy (1.17 debt service coverage for market rate transactions, or up to 1.11 for broadly affordable deals) for at least one month prior to the date of application, instead of three years prior to application. Borrowers can secure a term loan of up to 35 years.

To qualify for a green mortgage insurance premiums (MIP) reduction, borrowers will typically need to have obtained the applicable green certification at the time of construction.

Regarding how interest debt and equity will be treated, the newly built projects will need to be within a conservatively valued 85 percent loan-to-value ratio (LTV) and will allow for 80 percent cash-out.

The HUD Section 223(f) loan program provides a low-cost source of non-recourse, fixed-rate financing for the purchase or refinance of multifamily properties across the country. The financing features step down prepayment penalties defined at closing. This HUD loan features higher leverage for affordable or market-rate properties with highly competitive interest rates. The loans are also assumable.

Now that HUD has changed the three-year rule, this offers an excellent opportunity for multifamily developers and investors to refinance their debt to secure the best capital structure focused on their goals and growth objectives.   

Artin Anvar serves as managing director in the SunTrust Commercial Real Estate (CRE) line of business, which is part of Truist’s corporate & institutional group. He is located in the Washington, D.C. office and can be contacted via email at [email protected] or by phone at 602-400-4023.

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