FHA SECTION 223(a)7 REFINANCE GUIDELINES
Purpose:
Provides refinancing of full insurance mortgages already in HUD's insured portfolio in order to
improve their financial and physical condition and therefore, HUD's security.
Eligible Properties:
Applies to all HUD insured full insurance mortgages, except for hospital projects insured under
Section 242 or Section 241 supplemental loans for hospital projects, and may not be used in
conjunction with coinsured mortgages. Mortgages that were previously coinsured but converted
to full insurance and are not HUD-held may be refinanced under these procedures.
Interest Rate:
The interest rate stated in the note will be fixed for the term of the loan. The interest rate is a
function of the market for loans backed by FHA insurance and will be fixed at the date the loan is
committed to by an investor.
Term of Loan:
May not exceed the remaining term of the existing mortgage. However, the term may be up to
12 years beyond the term of the existing mortgage if required for project feasibility. The new
term can not exceed 75 percent of the project's remaining economic life.
Maximum Loan Refinancing:
The loan may not exceed the lowest of the following:
a) Original principal balance of the existing insured mortgage amount, or the
b) Unpaid principal balance of the existing insured mortgage amount plus:
c) cost of required improvement; and
d) outstanding debt incurred in connection with capital improvements made to the property that are acceptable to the Field Office; and
e) loan closing charges, including the application fee, inspection fee, financing fee, prepayment penalties, and title and recording and legal fee and
f) required deposits to the reserve for replacements. The cost of defeasance of any existing bond issue may not be included.
g) 90% of net operating income.
Personal Liability:
The loan is non-recourse.
Prepayment:
The loan is prepayable to the extent allowed based upon the prepayment language utilized when
the loan is placed with an investor. Investors allow varying prepayment provisions and could
require a prohibition on prepayment of up to ten years.
Standard prepayment provisions are as follows:
a) 5% the first year declining by 1% each year thereafter
b) 5 year lock-out, 5% the sixth year declining 1% each year thereafter
c) 10 year lock-out, 0% thereafter
The type of prepayment provision has a direct relationship to the interest rate required by the investor. The longer the prepayment prohibition, the lower the interest rate an investor will require.
Repairs:
Repairs may be included in the loan amount up to the greater of 15% of value or $6,500 per unit
times the area high cost ratio.
Escrows:
FHA requires cash escrows for the payment of taxes and insurance.
Replacement Reserves:
FHA requires a cash escrow for the replacement of short-lived items. The reserve escrow will be
calculated based upon the estimated useful life of the items and an initial deposit will be
required. An ongoing deposit is required and generally will range in an amount of $125 - $200
per unit per year.
FHA Application Fees:
$3.00 per $1,000 of the mortgage amount of which $1.50 per $1000 is refundable from HUD
after the loan closing.
Financing Fee:
An amount not to exceed 2.0% of the loan amount and payable at closing.
Placement Fee:
An amount not to exceed 1.5% of the loan amount and payable at closing.
Commitment Deposit Fee:
When the loan is committed to be purchased by an investor, a one half of one percent (1/2 of 1%)
deposit fee is required by the investor. This fee is not a financeable cost. It is refundable only in
the event the loan is purchased by the investor.
Mortgage Insurance Premium
Forty-five of one hundreds of one percent (.45%) for the first year (payable at closing) and forty-
five of one hundreds one percent (0.45%) per year thereafter (payable in monthly installments).
Third Party Report Costs:
Payable at the time of formal application to P/RMIC. The amount covers the cost for a Lead-
based Paint report (pre-1978 properties).
Funding:
Permanent financing is accomplished in the form of either 100% participation interest in the
insured loan, a GNMA security, or Tax Exempt Bonds which are placed with institutional
investors.
FHA Cash Requirements for Closing:
The borrower will need cash or letters of credit at loan closing for the following items:
a) Costs in excess of the FHA mortgage loan amount.
b) Operating Deficit Escrow if determined to be needed by FHA.
c) Required Repairs Escrow if determined to be needed by FHA