HUD Section 223(f) Three-Year Rule Lifted

The U.S. Department of Housing and Urban Development has revised its policy that previously required three years of post-construction occupancy of properties, when applying for refinancing under the National Housing Act Section 223(f). Today, Assistant Secretary for Housing – Federal Housing Commissioner Brian D. Montgomery issued a Housing Notice announcing the news.

Now, HUD is accepting applications for refinancing newly built or substantially rehabilitated properties as soon as properties achieve the applicable programmatic Debt Service Coverage Ratio (DSCR) for a minimum of one full month. Lifting the three-year requirement, the new policy will make FHA-insured mortgage financing available to borrowers sooner after construction completion and lease-up.

The program had been modified to facilitate opportunities for borrowers to refinance stabilized properties and to increase the supply of affordable and workforce housing. The policy also applies to mortgage insurance under Section 223(f), excluding Section 232 healthcare properties.

Underwriting Conditions and Information

(1) All projects submitted within three years of issuance of a final Certificate of Occupancy must have a minimum DSCR of 1.17 for market rate projects and 1.11 for Broadly Affordable projects.

(2) An income and expense statement beginning from initial occupancy to the application submission date, and a 12-month projection of income and expenses.

(3) A current rent roll, with existing rents and rents used to underwrite the existing mortgage.

(4) A leasing history from initial occupancy to the application submission date and the lease-up projection used to underwrite the existing mortgage.

(5) Rent concessions, discounts and short-term (less than 12-month) leases to secure prospective tenants.

(6) HUD will underwrite to actual revenue collected less normalized operating expenses to determine the required programmatic DSCR.

Cash out may be permitted, if the property meets the applicable programmatic DSCR. However, 50% of available cash will be held by the lender, until the property achieves for each of six consecutive months, the minimum applicable DSC, inclusive of the months of minimum debt coverage required prior to endorsement.

The policy will be in effect for two years. At that time HUD will assess whether the revision is achieving its objectives.

Click here to read Notice H 20-03 in its entirety.

Have questions on the elimination of the three-year rule? Contact Arbor today to speak with an originations specialist.