HUD 232 Replacement Reserve Requirements: Both HUD 232 loans for new construction and substantial rehabilitation and HUD 232/223(f) loans for purchase and refinancing require borrowers to have a certain replacement reserves. This is money which can fund the repair and replacement of outdated or broken building systems without putting a financial strain on the project itself.

Borrowers for these loans must provide a 15-year replacement reserve analysis along with their loan application. Plus, replacement reserves for both of these types of loans must have a minimum balance of $1,000 per unit in years 2 through 15 (HUD 232 loans), and in years 1 through 15 (HUD 232/223(f) loans).

Every 10 years, the lender must order a Project Capital Needs Assessment (PCNA) in order to analyze the needs of the project and determine if anything has substantially changed.

For HUD 232 loans, borrowers must provide a 15-year replacement reserve analysis along with their loan application. Plus, replacement reserves for both of these types of loans must have a minimum balance of $1,000 per unit in years 2 through 15 (HUD 232 loans), and in years 1 through 15 (HUD 232/223(f) loans).

For HUD 223(f) loans, HUD guidelines require minimum replacement reserves of $250 per unit, per year. In addition, HUD requires an initial deposit at closing. This can be funded by mortgage proceeds.

The benefits of having a Replacement Reserve for HUD 232 loans are that it provides funds to repair and replace outdated or broken building systems without putting a financial strain on the project itself. This helps to ensure that the project remains in good condition and is able to continue to provide housing for the long-term. Additionally, having a Replacement Reserve helps to protect the lender from potential losses due to unexpected repairs or replacements.

The risks of not having a Replacement Reserve for HUD 232 loans are that the borrower may not have the funds necessary to repair or replace outdated or broken building systems. This could lead to a financial strain on the project, and could potentially lead to the loan being defaulted on. Additionally, every 10 years, the lender must order a Project Capital Needs Assessment (PCNA) in order to analyze the needs of the project and determine if anything has substantially changed. Without a Replacement Reserve, the borrower may not have the funds necessary to cover the costs of the PCNA.

Source: www.hud232.loan/hud-232-faqs/replacement-reserves and www.hud232.loan/hud-232-glossary/replacement-reserves

The consequences of not meeting the Replacement Reserve requirements for HUD 232 loans can be severe. If the borrower does not have the required minimum balance of $1,000 per unit in years 2 through 15 (HUD 232 loans) or in years 1 through 15 (HUD 232/223(f) loans), the loan may not be approved. Additionally, if the lender does not order a Project Capital Needs Assessment (PCNA) every 10 years, the loan may be in default.

Sources:

• www.hud232.loan/hud-232-faqs/replacement-reserves
• www.hud232.loan/hud-232-glossary/replacement-reserves