Loan-to-Value (LTV) in HUD Loans: Limits and Cash-Out Rules

Key points

• For 223(f), value means HUD's estimate of value after completion of required repairs and improvements.
• Cash-out (equity out) refinances are capped at the greater of 80 percent LTV or the cost to refinance.
• HUD permits secured secondary financing on 223(f) loans up to total debt of 92.5 percent LTV, or as otherwise specified for affordable projects.
• 221(d)(4) uses a percentage of replacement cost, not value, so construction deals are limited by loan-to-cost.
• Waiving 223(f) LTV limits is reserved to HUD Headquarters.

How HUD applies loan-to-value

On the HUD-92264-A, Criterion 3 for a 223(f) refinance or acquisition is a percentage of HUD's estimated value of the property after required repairs and improvements. The appraiser's value is reviewed by the lender's underwriter and HUD, and HUD expects the capitalization rate to make sense against the mortgage constant. Because HUD takes the lowest of its criteria, LTV is the controlling limit mainly when interest rates are low relative to cap rates, or when a property's income is strong relative to its value.

The March 2021 MAP Guide sets the 223(f) value ratios at 85 percent for market rate properties and tax credit properties without a significant rent advantage, 87 percent for properties meeting HUD's affordable definition with achievable tax credit rents at least 10 percent below market, and 90 percent for Section 202 direct loans and properties with 90 percent or greater rental assistance. Acquisitions are also limited by the same percentages of total acquisition cost. Confirm current levels under HUD guidance.

Cash-out refinances

A 223(f) can return equity, but HUD limits it. Criterion 10 caps the loan at the greater of 80 percent of value or the cost to refinance (existing debt plus eligible transaction costs and repairs). When repairs are deferred to an escrow, the MAP Guide requires 50 percent of any cash out, after transaction costs and assurance of completion, to be held in escrow until the repairs are completed and HUD approves release. For properties less than three years past their certificate of occupancy, half of the available cash is held as a debt service reserve until six consecutive months of required coverage.

Statutory per-unit loan limits can be raised in high-cost areas with Regional Director approval, but the MAP Guide states they may never be increased to raise equity on a cash-out loan controlled by Criterion 10.

What counts as existing indebtedness

In a refinance, the cost to refinance starts with existing debt, which matters when the existing debt is a bridge loan. The MAP Guide states that bridge loans or other debt intended to increase the FHA-insured mortgage or circumvent program requirements will not be recognized as existing indebtedness in the cost basis. A bridge loan that financed an acquisition and documented improvements is ordinary existing debt; one that was upsized shortly before the HUD application to pull out cash will not raise the HUD loan above the cash-out limit.

Defeasance, yield maintenance and swap termination costs on existing financing are recognized in the cost basis only up to 10 percent of the requested HUD loan, and larger amounts can be paid from equity out only when the loan is at or below 80 percent LTV.

Secondary financing and construction deals

HUD loans must be first liens, but the MAP Guide permits secured secondary financing on 223(f) loans up to total debt of 92.5 percent of value, or as otherwise specified for affordable housing, subject to HUD's secondary financing rules. For 221(d)(4) new construction and substantial rehabilitation, the parallel criterion is a percentage of replacement cost: 85, 87 or 90 percent depending on affordability and rental assistance. Section 241(a) supplemental loans are limited by statute to 90 percent of the HUD-estimated value of the improvements being financed.

What borrowers should watch for

• Value is after repairs, so an incomplete renovation can still support value if the repairs are in the HUD scope and escrowed.
• Cash-out above roughly 80 percent LTV is not available; plan any partner buyout around that cap.
• A recent purchase price is strong evidence of value, and an appraisal well above it needs support.
• In 223(f) refinances where 80 percent or less of value controls, HUD does not require the modified cost certification.

Where to go next

For Bravo's 223(f) leverage and cash-out terms, see HUD 223(f) loans.

For common questions on HUD loan amounts, see HUD loan FAQ.

Related guides: HUD 223(f) Cash-out Refinance: How Equity Take-out Works; Using a HUD Refinance to Buy Out a Partner; How HUD Loan Sizing Works in a Bridge-to-HUD Plan.

Related terms: Debt Service Coverage Ratio (DSCR) in HUD Loan Sizing; Cash-Out Refinance Rules for HUD 223(f) Loans; HUD Appraisal: How HUD Values a Property for Loan Sizing; What Is a HUD Section 223(f) Loan?.

For portfolio figures by state, metro and program, see the HUD multifamily data hub. Bravo Capital’s record: all 26 HUD firm commitments received since April 2022 have closed, totaling $526.0 million (HUD Closing Scorecard).