HUD 232 Prepayment Penalties: What You Need to Know
Like many HUD multifamily loans, HUD 232 loans typically have prepayment penalties. Prepayment penalties are designed to protect lenders from the financial losses they will incur if and when a borrower decides to pay off their loan early. HUD 232 and HUD 223/223(f) loan prepayment penalties are negotiable, but usually have a two-year lock out period followed by a 8%- 1% step down premium (i.e. 8,7,6,5,4,3,2,1).
In the example above, if a borrower tried to pay off the loan in the fourth year, they would face a 7% prepayment penalty. In comparison, if they waited until the 6th year, the penalty would drop to 5%. After the 10th year (11th year and beyond), they would be able to pay off the loan without any additional fees.
HUD 232 Loan Assumption and Prepayment Penalties
If a HUD 232 borrower wants to sell a property after a few only years and avoid paying any prepayment penalties, they can do so by having the buyer assume their HUD 232 loan. HUD 232 and HUD 232/223(f) loans are fully assumable, but the new borrower must be approved by HUD and the by the lender. A small loan assumption fee is also typically required.