The FHA 223(f) Loan: The Advantages and Disadvantages

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LoanThe FHA 223(f) insured mortgage loan by the U.S. Department of Housing and Urban Development specifically for multifamily and apartment properties is among the most ideal loan programs out there. It’s not suitable for everyone or every type of property, however. Here’s what you should know when deciding if the FHA 223f loan is appropriate for your needs.

Advantages of the FHA 223(f) Loan Program

FHA 223(f) loans have the highest loan-to-value (LTV) ratio around. They eliminate the risk of interest and refinance with fixed terms for as much as 35 years. Their low rates are according to the GNMA or Government National Mortgage Association securities, and they’re assumable and non-recourse, meaning that you have a way out, which is great in a rising rate situation. You can also take advantage of funding either for improvement or repair of your property and other additional financing options. Additionally, there’s no minimum resident requirement, location restrictions, and definite financial ability requirements.

Disadvantages of the FHA 223(f) Loan Program

The primary disadvantages of FHA 223(f) loans are their higher costs—these include FHA and HUD fees on top of the actual loan, plus MIPs or mortgage insurance premiums, including annual and initial payments. They take longer time to process, which is typically between six and nine months. They also require audited statements yearly, reserve replacement escrows, and property inspections by the HUD. In addition, there are strict restrictions on cashouts and owner distributions.

The Takeaway says the FHA 223(f) loan is perfect for recently remodeled or newer properties with third party managers and veteran sponsors, since the condition of the property is crucial to the HUD at all stages of the loan.

The HUD also controls all owner distributions, performs inspections, and requires you to provide financial audits. The escrow will be established during closing and they will determine the time and specificities of property renovations and repairs.

If you’re fine with all of these, then you’ve found the best option for you. Its 35-year term on a fixed rate eliminates the risk of interest rate and refinance. Its non-recourse element gets rid of contingent and personal cost and liability. And when amortized during the life of the loan, it will be significantly more economical than refinancing the loan every five to 10 years.

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