Do HUD 232/223(f) Loans Permit Cash Out Refinancing?
In general, HUD 232/223(f) loans do not permit cash out refinancing. However, some borrowers choose to get a conventional (non-HUD) loan that permits cash out, and then quickly refinance their property with a HUD 232/223(f) loan.
HUD 232/223(f) Loans and Cash Out Refinancing
In general, HUD 232/223(f) loans do not permit cash out refinancing. However, some borrowers choose to get a conventional (non-HUD) loan that permits cash out, then quickly refinance their property with a HUD 232/223(f) loan. Traditionally, HUD’s ‘debt seasoning’ rules required that borrowers waited 2 years after taking out a loan on a property before securing HUD 232/223(f) refinancing. This was to ensure that a property had sufficient cash flow in order to be self-sustaining.
However, new HUD rules permit HUD 232/223(f) refinancing within two years of a borrower taking out a loan with cash out, albeit with stricter LTV requirements. These include:
70% Maximum LTV, if a property used more than 50% of their cash out for project purposes (not equity distribution)
60% Maximum LTV, if a property used less than 50% of their cash out for project purposes (and more than 50% for equity distribution)
What are the requirements for a HUD 232/223(f) loan?
In order to be eligible for HUD 232/223(f) financing, a project must:
- House 20 or more residents
- Provide ongoing medical care for long-term patients
- Be licensed by the appropriate municipal or state organization/agency
- Have been constructed least three years ago, though newer property additions are allowed, as long as they are smaller than the original structure
- Have no more than 20% of the project's gross area or gross income devoted to/derived from non-resident day care
- Have no more than 25% of all units designated as independent living units
- Have no more than 20% of the gross floor space filled and no more than 20% of the property's income derived from commercial tenants
Additionally, properties must:
- Be licensed skilled-nursing or assisted living centers (regulated by a state or local board)
- Have been complete for at least 36 months
- Have no more than 20% of the floor area occupied by commercial space
- Have no more than 25% of the units designed for independent living
- Accommodate 20 or more patients in need of skilled nursing care
What is the maximum loan amount for a HUD 232/223(f) loan?
The maximum loan amount for a HUD 232/223(f) loan is not specified, however, loans above a certain size may have stricter requirements. For example, for HUD 223(f) loans above $75 million, the maximum Loan-to-Value (LTV) is 80% and the minimum Debt Service Coverage Ratio (DSCR) is 1.25x. For loans above $100 million, HUD may decide to impose even more restrictive LTV and DSCR requirements. Additionally, the overall size of a HUD 223(f) loan cannot go beyond a specific per-unit limit set by HUD (and adjusted by project location).
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What is the difference between a HUD 232/223(f) loan and a cash out refinance?
HUD 232/223(f) loans do not generally permit cash out refinancing. However, some borrowers choose to get a conventional (non-HUD) loan that permits cash out, then quickly refinance their property with a HUD 232/223(f) loan. HUD rules permit HUD 232/223(f) refinancing within two years of a borrower taking out a loan with cash out, albeit with stricter LTV requirements. These include:
- 70% Maximum LTV, if a property used more than 50% of their cash out for project purposes (not equity distribution)
- 60% Maximum LTV, if a property used less than 50% of their cash out for project purposes (and more than 50% for equity distribution)
HUD 223(f) loans permit cash out when 80% of the property's value is greater than the existing debt plus any and all transaction costs. However, only 50% of the funds will be provided to the borrower at closing. The remaining 50% will be put in escrow until the borrower completes any important repairs. On top of that, the repairs must be inspected and approved by HUD before the funds are released.
What are the benefits of a HUD 232/223(f) loan?
HUD 232/223(f) loans offer a variety of features that make them particularly affordable and competitive for developers. These include:
- High LTV purchase allowance of <85% of the acquisition price/appraised value (for non-profits) and <90% (for-profits)
- High LTV refinance allowance of <100% refinance cost or 85% of the appraised value (for non-profits) and 90% of the appraised value (for-profits)
- 35- year maximum term
- Non-recourse
- Fixed-rate
In addition, HUD 232/223(f) loans offer low, fixed interest rates and are fully assumable (with FHA/HUD approval). They are also non-recourse, limiting risks for developers.
Are there any restrictions on how the proceeds of a HUD 232/223(f) loan can be used?
Yes, there are restrictions on how the proceeds of a HUD 232/223(f) loan can be used. According to www.multifamily.loans/hud-232-223f-loans, HUD 232/223(f) loans cannot be used for cash out refinancing. This means that the proceeds of the loan must be used for the acquisition, construction, or refinancing of a property, and cannot be used for any other purpose. Additionally, according to www.hud223f.loans/hud-223f-faqs/student-housing, HUD 223(f) loans can finance student housing under certain conditions, such as having no more than 20% of the project's gross area or gross income devoted to/derived from non-resident day care, and having no more than 25% of all units designated as independent living units.
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