Section 223(f) sizing runs on a three-tier structure, and which tier a property falls into changes the loan materially. The tiers are not intuitive, and the most common error is assuming that a LIHTC property automatically qualifies for the affordable tier. It does not.
| Tier | Max LTV | DSCR | Min vacancy |
|---|---|---|---|
| Market rate, or LIHTC without rent advantage | 87% | 1.15x | 7% |
| Affordable — LIHTC with rent advantage to market | 90% | 1.11x | 5% |
| 90% or more of units with rental assistance | 90% | 1.11x | 3% |
Source: ML 2025-03, Jan. 8, 2025.
The rent advantage test
The middle tier requires that the property's restricted rents carry an advantage relative to market rents. The economic logic is sound: a LIHTC property whose restricted rents sit meaningfully below achievable market rents has a cushion. If the market softens, the restricted rents are still collectible, because they were never at the top of the market to begin with. HUD will lend at higher leverage against that cushion.
A LIHTC property in a soft submarket where restricted rents are at or above achievable market rents has no such cushion. The restriction is not protective — it is simply a ceiling on a rent the market would not pay anyway. Those properties are underwritten as market rate, at 87% and 1.15x with a 7% vacancy floor, notwithstanding the tax credits.
Practical consequence. Two LIHTC properties with identical rent rolls can land in different tiers depending on the market rents around them. The appraisal is what establishes this, which means the tier is not fully knowable until the appraisal is in — and a sponsor who has modeled 90% leverage on the strength of having tax credits may be looking at 87%.
The rental assistance tier
The top tier requires 90% or more of units covered by rental assistance. In practice that means a project-based contract — project-based Section 8 or a comparable arrangement — covering substantially the whole property.
Tenant-based vouchers do not get you here. A property where 40% of residents happen to hold Housing Choice Vouchers is not a 90%-rental-assistance property; the assistance follows the tenant, not the unit, and HUD does not treat it as a contractual revenue stream attached to the asset.
The reward for qualifying is the 3% vacancy floor, which is the most valuable single element in the table. On a fully contracted property, underwriting at 3% vacancy rather than 7% raises underwritten NOI by roughly four percent of gross potential rent, and that flows directly into the coverage test.
Why the vacancy floor often matters more than the ratio
Borrowers focus on the coverage ratio because it is the headline number. The vacancy floor frequently does more work. Consider a property running 3% actual physical vacancy:
- In the market-rate tier, it is underwritten at 7% — a four-point haircut to income that exists only on paper.
- In the affordable tier, at 5% — a two-point haircut.
- In the rental assistance tier, at 3% — no haircut.
That difference in underwritten NOI compounds with the coverage ratio in the DSCR criterion. Moving from market rate to the rental assistance tier improves both the numerator and the divisor simultaneously.
Getting the tier right early
Ask the lender, at the term sheet stage, which tier they are sizing to and what evidence establishes it. For a LIHTC deal, ask specifically what the appraiser is expected to conclude about market rents relative to restricted rents, and what happens to the sizing if that conclusion goes the other way. A term sheet that assumes the affordable tier without addressing the rent advantage question is a term sheet with an unpriced risk in it.
None of this applies to healthcare properties, which are sized under an entirely separate regime — 1.45x coverage and 80% leverage — and which ML 2025-03 expressly does not reach.
Primary sources for this article
- Mortgagee Letter 2025-03 — DSCR and LTV/LTC requirements
- MAP Guide, Handbook 4430.G — affordability definitions and underwriting
Figures stated as current are current as of October 13, 2026. HUD revises mortgagee letters and handbooks frequently; where a provision is a draft rather than operative guidance we say so on the page. This is general information, not legal, tax or financial advice, and not a commitment to lend.
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