When interest rates rise, the HUD 221(d)(4) loan could be the ideal financing option for developing or rehabilitating multifamily properties. Here, we provide a brief overview of the HUD 221(d)(4) loan and discuss the factors for a successful application.
What is a HUD 221(d)(4) Loan?
HUD 221(d)(4), also known as FHA 221(d)(4)) is the industry's highest-leverage, non-recourse, lowest-cost fixed-rate financing available on the market. The program is used for multifamily new construction or for the rehabilitation of units. It comes with attractive loan terms that include interest only during the construction phase, followed by a fully amortized 40-year fixed rate term. The HUD 221 (d)(4) loan is assumable. Take a look at our helpful FAQs and infographic for further details.
Important Factors for the HUD 221(d)(4) Loan
There are several factors to consider when obtaining HUD 221(d)(4) financing.
- The general contractor and management company should have experience with HUD-insured projects. The borrower must be able to provide the lender with pro forma operating statements with as much detailed information as possible. It's essential to include the number of units, unit mix, rent projections, and expense projections.
- The developer will need to provide market research or a market study and supply the estimated construction costs of the project. Market research will reflect the demand for additional units and how quickly units can be absorbed after construction is completed.
- 3rd party reports that the lender orders will include an appraisal, market study, environmental site assessment, architectural plan and cost review.
- A working capital escrow of 4% of the loan amount is required (2% to working capital expenses and 2% to construction contingency).
HUD FHA 221(d)(4) is based on Loan-to-Cost (LTC). LTC ratio is a value used to determine how much a development project will be financed by equity versus debt. LTC is determined by the loan amount divided by the cost of construction.
Additional considerations for HUD 221(d)(4) are:
- HUD 221(d)(4) transactions are fully assumable, with approvals needed from the lender and HUD, along with an assumption fee of 0.05% of the original loan amount. HUD requires there to be a demand for the proposed units and that there is no oversupply in the current market or if there are other proposed units coming soon.
- All environmental remediation must be done at the site. Environmental remediation includes removing contaminants from the surface water, groundwater, soil, etc.
As with many HUD financing options, the application process is complicated. The HUD 221(d)(4) loan application process can be broken down into three stages, including:
- Pre-application/meeting stage
- Firm commitment stage
- Lock in rate and closing
At each stage, HUD considers many factors, including appraisals, market analysis, documentation, and there is plenty of paperwork to complete throughout the process. The average HUD 221(d)(4) application process can take 9 - 12 months from beginning to end, but this could be longer or shorter due to any number of issues.
Make the Process Easier with LSG Lending Advisors
With over two decades of experience in residential and commercial lending, we specialize in underwriting and originating all HUD, FHA, and MAP loans. As an approved HUD/FHA lender, we are experienced in applying for HUD 221(d)(4) multifamily construction loans, and will find you the lowest rates and best terms.
Contact us today to discuss HUD 221(d)(4) multifamily construction loans, bridge loans, transaction questions, market studies, interest rates, or any residential or commercial lending concerns.