Prepayment and the HUD 221(d)(4) Loan Program
Prepayment occurs when a borrower pays off the balance of a loan before it matures. Prepaying FHA multifamily construction loans requires prior approval by HUD. Prepayment also typically requires that a borrower pay a specific prepayment penalty to their lender in order to compensate them for their financial loss. For HUD 221(d)(4) loans, prepayment penalties typically consist of a two-year lockout, in which a borrower cannot repay their loan at all, followed by an 8% declining prepayment penalty. This means that the prepayment penalty will decline from 8% in the third year, to 1% in the tenth year, and will fall to 0% for all years thereafter.
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