Why HUD borrowers have more flexibility than expected

Multifamily and senior housing owners who financed with HUD over the past few years may be holding more flexibility than they realize. Rates have stayed well above pre-COVID levels, construction costs remain elevated and new financing activity slowed at the end of last year.¹ But a HUD-insured loan carries something most conventional debt does not: a built-in path to a lower rate whenever the market turns.

“Once people know about it, it gives them a little more ease,” says Artin Anvar, Capital One’s senior vice president of agency financing. “They may realize that ‘maybe I’m not locked into this 5.8% for 10 years. If rates move down, I can work my way out of it and have better debt service coverage.’”

That flexibility comes from built-in provisions in HUD lending agreements that some borrowers may not even realize they have. HUD runs two programs that let owners of existing, FHA-insured multifamily and senior housing properties cut debt service when rates improve.

The streamlined refinancing option, which falls under HUD Section 223(a)(7), requires no appraisal, no market study and no new environmental report—only a project’s capital needs assessment. It pushes the term back toward the original, so an owner five years into a 35-year 223(f) loan can go back out to a full 35 years, with the amortization schedule reset to match. If the loan has been paid down, the new mortgage can return to the original principal amount. However, the proceeds can’t be taken out as unrestricted cash. They must fund reserves, repairs or transaction costs. Most lenders can close a 223(a)(7) refinancing in 120 to 150 days.¹

Another option is interest rate reduction (IRR), which lenders usually call a rate modification or a note mod. Under this program, only the rate on the note changes. Term, amortization schedule and principal balance stay the same, and the new payment simply reflects the lower coupon. Costs typically are limited to legal and title work, and the process can close in just around 60 days.¹

“Both of these programs give you flexibility and optionality, especially for long-term, assumable, non-recourse loans for both multifamily and senior housing,” Anvar says.

A HUD loan typically carries 10 years of prepayment structure as a step-down: 10% in year one, declining a point a year to 1% in year 10. The penalty is a known, declining, dollar-certain number—and under HUD Section 223(a)(7) it can be financed into a new loan rate instead of paid out of pocket.

By comparison, CMBS, Fannie Mae, and Freddie Mac loans rely on yield maintenance or defeasance penalties tied to Treasury yields.² These penalties grow significantly more expensive as interest rates fall, creating a major financial barrier at the exact moment an owner wants to refinance.

HUD 223(a)(7) programs avoid these costs.

“Imagine you are in year three of a HUD loan and rates drop to 4%. You can do the streamlined refinance, pay the 7% prepayment penalty and you can roll it into the rate and still have savings,” Anvar says. “You’re not putting money out for the prepayment penalty.”

Owners who financed at 5.5% after the financial crisis, for example, refinanced into the 4% or 3% range—and in some cases even lower—on 35-year loans.

“I’ve had clients use the same program two or three times on the same property as rates went down,” Anvar says.

The tradeoff on a 223(a)(7) is that the prepayment schedule resets. An owner who refinanced in year three starts a fresh 10-year step-down, which matters if they want to sell in year five or six. Owners must decide whether a coupon that’s 150 to 200 basis points higher is worth it to preserve a lower penalty at exit.

Neither program allows you to pull cash out. In terms of closing costs, a rate modification is your cheapest option.  Using the HUD Section 223(a)(7) program option costs slightly more because it restructures the loan terms, but both options are significantly less expensive than a full regular refinance. Anvar says. “If you’re not going to hold, you have to do that analysis.”

The HUD 223(a)(7) loan option also solves a specific problem for sponsors who built in the past few years. New construction financing under HUD’s 221(d)(4) program runs about 100 basis points above refinance debt—about 6.7% versus 5.6%.³ Once the asset stabilizes and rates improve, a HUD 223(a)(7) can convert that construction coupon into refinance pricing without a new transaction and without surrendering the 40-year term.

HUD, through FHA, insures these loans, so lower debt service across the portfolio means lower default risk. “They would love their entire portfolio to have lower debt service,” Anvar says.

Nobody is making a call on the direction of rates, but HUD lending has always run countercyclical. When banks tighten, when CMBS lenders pull back and when non-recourse debt gets hard to find, HUD often stays open as a source of financing. Its loans are securitized into Ginnie Mae bonds (PDF | 160 KB) carrying the full faith and credit of the United States, which helps to keep the bid on track even in strained markets. While it requires more documentation, the cost difference between a HUD execution and a bank refinancing is usually much narrower than it was 15 years ago.

With $875 billion in commercial and multifamily mortgages maturing this year,⁴ the owners in the best position are the ones who know where their coupon sits relative to the market—and who have someone watching it for them.

“For the projects I finance and the clients I have, I track it,” Anvar says. “I know where people’s rates are, and I know when we’re getting close. Then I call and say, ‘I think it’s time to look at this.’"

That’s the value of the relationship. Rates will move, and the owners who move first are frequently the ones who already knew what their options were.

 

Explore how Capital One’s Commercial Real Estate Experts can help you navigate HUD 223(a)(7) and other refinancing strategies tailored to your portfolio goals. 

 

1. Capital One reported data as of September 2026.

2. Fannie Mae, "DUS Program Overview," June 2026.

3. U.S. Department of Housing and Urban Development. (2019). Fiscal Year 2020 congressional justifications: Mutual mortgage insurance.

4. Mortgage Bankers Association. (2026, February 9). 17 percent of commercial and multifamily mortgage balances will mature in 2026.