HUD 223(f) Loans: Rates, LTV, Terms & Requirements

HUD 223(f) loans are used to finance stabilized multifamily properties for acquisition or refinance. For developers and apartment owners, the program can provide long-term, fixed-rate, fully amortizing financing, and the post-2020 rule change can make cash-out refinancing available earlier after a newly built property stabilizes.

In this article, Skylatus Property Capital summarizes Randy Efron’s overview of the HUD 223(f) loan product. Randy explains how HUD 223(f) financing applies to stabilized multifamily assets, why the removal of the former three-year property age requirement matters, how cash-out refinances can affect developer IRR, and how HUD sizes loan proceeds for market-rate, affordable, and rental assistance properties.

HUD 223(f) financing can be a powerful tool for the right property and business plan, but it is not simply a generic permanent loan. Sponsors need to understand stabilization, DSCR, cash-out holdbacks, deferred maintenance, loan term, amortization, and leverage requirements before relying on this execution.

What Are HUD 223(f) Loans?

HUD 223(f) loans are used to finance stabilized multifamily properties with five or more units. The program can be used for both acquisition and refinance.

In Randy’s explanation, HUD 223(f) is different from HUD 221(d)(4). HUD 221(d)(4) is used for multifamily construction or substantial renovation, while HUD 223(f) is used for stabilized properties.

For a broader overview of apartment financing options, sponsors can review Skylatus’s guide to multifamily financing. For the broader HUD/FHA apartment financing cluster, review FHA multifamily financing.

Why Stabilization Matters

HUD 223(f) loans are designed for stabilized multifamily properties. Randy explains that HUD can underwrite actual revenue collected less normalized operating expenses to determine the property’s debt service coverage ratio.

That is important because HUD 223(f) eligibility is not only about the property type. It is also about whether the property has achieved the required debt service coverage ratio, or DSCR.

For developers, this distinction matters. A newly built property may become eligible for HUD 223(f) financing after it achieves stabilization, rather than being forced to wait only because of age.

Why the 2020 Rule Change Matters for Developers

Randy notes that HUD previously had a rule requiring a property to be at least three years old before it could be eligible for a HUD 223(f) loan. HUD lifted that requirement in 2020.

That change can be meaningful for multifamily developers. Instead of waiting three years after construction before applying for HUD 223(f) financing, a developer can submit a loan application once the property achieves HUD’s required DSCR for a minimum of one month.

This can change the exit and refinance strategy for a newly built apartment project. A developer may build the property with a traditional construction loan and then pursue a HUD 223(f) cash-out refinance after the property stabilizes.

HUD 223(f) Cash-Out Refinance Rules

Randy explains that cash-out refinances are allowed when 80% of value exceeds the existing debt plus transaction costs.

However, there is an important caveat. In a cash-out refinance, 50% of the available cash is held by the lender until the property achieves the required DSCR for six consecutive months. Those six months can include the months of minimum debt service coverage required prior to closing.

HUD also requires all deferred maintenance items to be completed before the 50% holdback is released.

Even with this holdback, Randy explains that receiving a portion of cash-out proceeds in year two or year three can still be better for IRR than waiting until year five. The reason is straightforward: earlier distributions generally improve internal rate of return.

Loan Term, Amortization and Fixed Rates

The HUD 223(f) loan term is equal to the lesser of 35 years or 75% of the remaining economic life of the improvements. Randy also notes that the loan term will never be less than 10 years.

From a practical standpoint, Randy explains that most loans end up being 35 years long. During that term, the loan fully amortizes. That means the loan balance reaches zero at the end of the loan term.

Rates are fixed throughout the loan term. Randy notes that HUD 223(f) rates are almost always lower than conventional financing and Fannie Mae or Freddie Mac loans.

This article addresses HUD 223(f) rate structure conceptually rather than quoting current market rates, which change frequently.

Loan Sizing, LTC and DSCR by Property Type

Randy explains that HUD 223(f) loan proceeds depend on two primary loan sizing stipulations: loan-to-cost and debt service coverage ratio.

The loan-to-cost ratio depends on the property type. The DSCR requirement also depends on the property type.

For cash-out refinances, Randy explains that cash out is allowed when 80% of value exceeds the existing debt plus transaction costs.

For broader loan sizing and underwriting concepts, sponsors can also review Skylatus’s explanation of debt yield.

Why Affordable Housing Receives Stronger Leverage

Randy explains that the loan sizing stipulations change between market-rate, affordable and rental assistance properties because HUD is a governmental agency that wants to promote community development and affordable housing.

As a result, HUD can reward affordable property investors with higher leverage loans and lower DSCR requirements compared with market-rate properties.

For sponsors, this means property type and affordability profile can materially affect loan proceeds. A market-rate apartment building, an affordable property and a rental assistance property may not size the same way even if they are otherwise similar.

When HUD 223(f) Financing May Fit

HUD 223(f) financing may fit when a sponsor is acquiring or refinancing a stabilized multifamily property and wants long-term, fixed-rate, fully amortizing debt.

It may be particularly relevant when the sponsor values:

• Long-term fixed-rate financing
• Fully amortizing debt
• Permanent financing for a stabilized property
• Potential cash-out refinance after stabilization
• Higher leverage for qualifying affordable or rental assistance properties
• A refinance strategy after developing a property with a traditional construction loan

HUD 223(f) may be less appropriate when the property is not yet stabilized, when the sponsor needs a faster or more flexible execution, or when the asset still requires transitional capital. In those cases, multifamily bridge loans, bank debt, agency debt, or other types of capital may be more practical.

HUD 223(f) Compared With HUD 221(d)(4)

One of the most common questions sponsors ask is how HUD 223(f) differs from HUD 221(d)(4).

For a construction-oriented financing strategy, sponsors may also review Skylatus’s page on ground-up construction financing.

Practical Takeaways for Multifamily Sponsors

• HUD 223(f) loans finance stabilized multifamily properties with five or more units.
• The program can be used for acquisition or refinance.
• HUD removed the former three-year property age requirement in 2020.
• A developer can apply after the property achieves HUD’s required DSCR for a minimum of one month.
• HUD underwrites actual revenue collected less normalized operating expenses to determine DSCR.
• Cash-out refinances are allowed when 80% of value exceeds existing debt plus transaction costs.
• For cash-out refinances, 50% of available cash may be held until six consecutive months of required DSCR and deferred maintenance completion.
• The loan term is the lesser of 35 years or 75% of remaining economic life, but never less than 10 years.
• Most loans end up being 35 years from a practical standpoint, according to Randy.
• The loan fully amortizes over the loan term.
• Loan sizing depends on LTC and DSCR requirements, which vary by property type.
• HUD can provide stronger leverage for affordable and rental assistance properties because of its community development mission.

Conclusion

HUD 223(f) loans can be valuable for stabilized multifamily acquisitions and refinances. They can provide long-term, fixed-rate, fully amortizing financing and may create a powerful refinance option for developers after a newly built property reaches stabilization.

The post-2020 rule change is important because developers may no longer need to wait three years solely because the property is new. Once the property achieves HUD’s required DSCR for a minimum of one month, a HUD 223(f) application may be possible, subject to the full program requirements.

For multifamily sponsors, the practical question is whether the property, DSCR, affordability profile, timing, deferred maintenance, cash-out goals and capital structure fit the HUD 223(f) execution.