HUD 223(f) Changes to Cash-Out Escrow

Check out the current updates to the HUD 223(f) program.

Current HUD borrowers under the 223(f) program should be happy to learn of the recent quality of life changes made to the program regarding equity take-out. Due to the impacts of Covid-19, HUD in 2020 instituted a Covid-19 escrow equivalent, which works out to 9 months of debt service meant to be held for six months after the loan is closed. However, the HUD 223(f) program already had provisions in place regarding equity take-out, and the two don’t exactly work in tandem.

Under the 223(f) program, borrowers who identified repairs as a part of their refinance transaction faced a requirement to complete all of those repairs before their total equity was released to them. This “50% Holdback Rule” basically meant that for a loan with $15,000 worth of identified repairs and a $700,000 cash out, $350,000 of that equity would be withheld in escrow until all of those repairs get completed. The idea was to incentivize borrowers to have the repairs completed in a timely fashion.

It didn’t take too long for the folks in charge to realize that the 50% Holdback rule along with the covid-19 escrow (to which cash-out proceeds can be utilized for funding purposes) were actually prohibitive of one another. HUD has since opted to allow borrowers to receive the full sum of cash-out proceeds after the covid-19 escrow is funded. This move works out much better for borrowers since the 50% holdback rule restricts cash flow, while this new arrangement allows borrowers to have access to more cash at closing.

Interestingly, this puts HUD apartment financing in the spotlight for many borrowers who would have only considered bank or agency financing before. HUD’s stellar interest rates and relatively high cash-out leverage (at 80%$ LTV) can finally shine as a strong stand-out option for apartment finance.

2021 Sample Terms For HUD 223(f) Loans

Size: Minimum $1 million (some exceptions allowed on an individual basis)

Term: Minimum term of 10 years, maximum of 35 years, or 75% of the property's remaining economic life, whichever is less

Amortization: Up to 35 years

Maximum LTV: 83.3% for market-rate properties, 85% for affordable properties, 87% for rental assistance properties

Minimum DSCR: 1.17x for market-rate properties, 1.15x for affordable properties