Rental Housing for Refinancing of Existing Properties Section 223(f)

The Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD), provides mortgage insurance to facilitate the refinancing or purchase of rental housing that does not require substantial rehabilitation. The Section 207/223(f) program is FHA's program for insuring such properties which may or may not require minor repairs and improvements.

Benefits:

  • Long-term (up to 35 years), fixed-rate financing
  • Federal guarantee results in AAA rating on financing
  • Eligible for securitization by the Government National Mortgage Association (Ginnie Mae)
  • Nonrecourse loans

Program Eligibility:

  • Properties must contain 5 or more rental or cooperative units
  • Properties must not require substantial rehabilitation although minor repairs and improvements are permitted
  • Properties must be at least 3 years old prior to filing of an application
  • Projects must attain sustaining occupancy before insurance endorsement or an operating deficit escrow is required
  • Eligible mortgagors include individuals, partnerships, corporations or other legal entities approved by FHA
  • No construction financing is available
In FY 1995, FHA insured $3.8 billion in mortgages under its multifamily programs.

Mortgage Limitations: The maximum insurable mortgage amount is the LOWEST of:

  • 85 percent of FHA's estimate of the project's value as follows:
    • For a refinance, the cost to refinance the project not to exceed 85 percent of value including repairs, but not less than 70 percent of value
    • For a purchase, 85 percent of the cost to acquire the project not to exceed 85 percent of the project's value after repairs
  • The amount that can be amortized by 85 percent of net income for debt service
  • Statutory per dwelling unit limits. These limits vary by HUD State/Area Office jurisdiction.

NOTE: The typical mortgage limiting factor is net income - FHA's underwriting analysis must establish that there is sufficient project income to repay the loan, taking into account all required expenses, replacement reserve requirements, and a vacancy and collection loss factor.

Mortgage Term and Interest Rate:

  • Term is limited to the lower of 35 years or 3/4 of the project's remaining economic life
  • Interest rates are negotiated between the lender and the borrower

Other Requirements:

  • Applications may be staged (e.g., conditional and firm commitment), although most Section 207/223(f) projects are submitted only at the firm stage. Application fee and a limited inspection fee apply. The application fee aggregates to $3.00 per $1,000 of requested mortgage amount at the firm commitment stage.
  • Owner must sign Regulatory Agreement with HUD governing project operations
  • Projects are subject to cost certification
  • Prevailing wage requirements under the Davis-Bacon Act do not apply