Lower My Rate – HUD 223(a)(7)
By Andrew Hanzl
Have you acquired or built a multi-family or healthcare property utilizing a HUD-Insured loan? If yes you might want to consider refinancing through the HUD 223(a)(7) program in order to increase your properties cash flow. I know what you are thinking, dealing with anything HUD related is time-consuming and frustrating and it’s probably not worth my troubles, keep reading and I bet you will reconsider.
Refinancing using the 223(a)(7) program has two primary purposes both intended to increase the property’s cash flow while at the same time reducing the risk to the FHA Insurance Fund. The first reason a borrower pursues 223(a)(7) is to lower their interest rate, which is especially true in today’s historically low-interest rate environment. Although it will vary by property location, asset quality, experience of the sponsor, etc. it would not be atypical to see an interest rate in the low to mid 3.0% range upon refinancing under this program. Even when factoring in the additional closing costs/prepayments penalties associated with the refinance the overall debt service payment in most cases is drastically lower going forward. Another appealing feature of the 223(a)(7) program is the ability to extend out the loan term for up to 12 additional years, so long as the new loan term doesn’t exceed the original loan term (35 or 40 years depending on which loan product you are refinancing). Stretching out the amortization period can also substantially reduce your annual debt service payment especially for loans that have been out for longer periods, allowing for more term to be recast.
Refinancing through the 223(a)(7) program requires drastically less paper-work and is a much quicker process in comparison to the other HUD loan products (HUD 221(d)(4), HUD 223(f), etc.) which can take over a year in some cases to close. Typically, the closing process on the 223(a)(7) is between 90-120 days. The application is submitted within 30 days of engagement, followed by 45-60 days to issuance of HUD’s commitment, and then 30 days to closing. Unlike most other refinances which require a fresh appraisal, market report, property condition report, and an environmental report, the 223(a)(7) program only requires a Project Capital Needs Assessment (“PCNA”). This assessment is a detailed property condition report intended to ensure that the project remains safe and will continue to be financially viable (i.e. will not pose a significant financial risk to HUD).
The 223(a)(7) program is limited to existing properties in residential use, therefore, excluding new construction, expansion of existing properties, and properties in need of significant repairs that include ground disturbances. Also, the proceeds from the refinance are limited to paying-off of the existing debt, prepayment penalties, the cost of critical and non-critical repairs, deposits for replacement accounts, as well as paying necessary the closing costs. Although the loan program prohibits borrowers from cashing-out equity it will allow them to close the refinance without infusing any additional equity to pay for the necessary repairs and fees.
A couple of other noteworthy points are if you were considering selling your property after securing the 223(a)(7) loan they are assumable to the next buyer subject to HUD’s approval. As far as pre-payment penalties are concerned typical options include a 2-year lockout followed by a pre-penalty of 8% in the 3rd year, declining 1% each year thereafter and reaching zero after the 10th year.
We recently helped a client refinance a multi-family property with a HUD 223(a)(7) loan and in turn lowered their interest rate by over 1.0% and locked in a new 40-year term at approximately 3.25%. If you would like more information about the HUD 223(A)(7) or would like assistance securing financing with this loan product or any other agency loan, please contact Andrew Hanzl at [email protected].
The Author, Andrew Hanzl, is a Senior Analyst in the Dallas Office of Metropolitan Capital Advisors.