Do you have a HUD loan with a high interest rate? If so, you might consider taking advantage of the current market rates and refinancing your multifamily loan. While weighing this decision, it’s helpful to work with a knowledgeable team of mortgage experts and trusted financial advisors who can guide you in your decision-making process. There are two great options for borrowers looking to reduce the interest rate of their multifamily HUD loan: interest rate reduction (IRR) (also known as a loan modification) and the FHA 223(a)(7) loan program. In addition to lowering the interest rate, either of these products will decrease your debt service payments and ultimately increase the value of your property. Let’s take a closer look at the specifics of these two loan products or visit our side-by-side comparison.
INTEREST RATE REDUCTION
An interest rate reduction (IRR) allows borrowers to modify their existing FHA loan in order to reduce their interest rate.
Only the FHA mortgagee, or lender of record, can execute an IRR. For instance, if your loan is held by Love Funding, we can provide a low cost and relatively simple option to decrease your interest rate through an interest rate reduction. With a modification agreement, you, your lender and HUD are simply agreeing to reduce your interest rate without having to refinance your current mortgage. An interest rate reduction will keep the existing maturity the same, pay off the existing GNMA investor with the proceeds of a new GNMA MBS issue and reset the pre-payment provisions.
Transaction costs for IRRs are usually nominal and include:
- Borrower legal fees
- Lender legal fees
- Title and recording fees
- GNMA fees
However, there are no additional costs like financing fees, placement fees, third party costs (i.e. a Project Capital Needs Assessment so long as one has been completed in the past 10 years), appraisal fees or HUD application fees. Additionally, the HUD mortgage insurance premium would stay the same.
The prepayment penalty associated with your current GNMA MBS would be rolled in to the new interest rate, as would the nominal costs associated with lender legal fees, title and recording fees, and GNMA fees. Only borrower legal fees would be an out-of-pocket cost.
HUD has a streamlined approval process for IRR applications and the execution takes approximately 30-45 days. Use our checklist to keep track of all of the documents needed for your loan modification.
An FHA 223(a)(7) might be a good choice for borrowers looking to increase the term of the mortgage and/or increase the mortgage proceeds back to the original amount.
Unlike an IRR, the lender you decide to use does not have to be the current FHA mortgagee. The 223(a)(7) is a streamlined program that allows you to lower your interest rate and increase the unpaid principal amount to cover closing costs, pay for any needed or desired repairs and replenish the project’s replacement reserve account. Additionally, you would be able to re-amortize your loan either within the remaining term or with an extension, limited to 12 years beyond the remaining term of the existing mortgage. It is important to note that the 223(a)(7) loan amount may not exceed the finally-endorsed mortgage amount for the existing loan.
An FHA 223(a)(7) is a new loan, so execution time is a bit longer taking 90-120 days. Click to learn more if you’re considering refinancing your loan with an FHA 223(a)(7).