What are the Benefits of HUD 221(d)(4) Loans?

Benefits of the HUD 221(d)(4) Loan Program

HUD 221(d)(4) loans offer an incredible opportunity for multifamily investors and developers to access the industry’s longest-term form of fixed-rate construction and substantial rehabilitation financing. With terms of up to 40 years (43 years with the 3-year construction period), these loans are also non-recourse, fully assumable, and offer high leverage.

In general, it’s extremely difficult for investors and developers to find financing that will cover both the construction and post-construction period for a multifamily property, all in one loan. This is especially the case since Fannie Mae and Freddie Mac do not provide financing for the construction of multifamily properties, only for property rehab, acquisition, and refinancing (and certain combinations thereof).

In most cases, multifamily investors and developers will have to take out an more expensive bank loan, which will only permit up to 75% LTC in most cases. After, they’ll need to refinance into a permanent loan, which will often come in the form of CMBS financing, Freddie Mac, Fannie Mae, or even a HUD multifamily refinancing loan, such as the HUD 223(f) loan. While there’s nothing necessarily wrong with this, having to deal multiple closings can be expensive, as appraisals, third-party reports, legal, and other costs will be repeated twice in the span of a year or two.

HUD 221(d)(4) Leverage is Unsurpassed

Even when compared to most loans for property acquisition and refinancing (which is not a truly accurate comparison, as these loans usually offer higher LTVs), HUD 221(d)(4) loans still come out on top. In fact, HUD 221(d)(4) financing offers up to 90% LTV for subsidized properties, up to 87% LTV for affordable properties, and up to 85% for market-rate properties. CMBS, Freddie Mac, Fannie Mae, and life company loans can’t even come close. To compare, CMBS loans offer a maximum of 80% LTV (in exceptional situations), and these loans are only partially amortizing. Life company loans offer 75%, but more often, only provide up to 65%. And, Freddie Mac and Fannie Mae, while offering up to 80% in some situations, typically only offer 70-75% for fully amortizing, fixed-rate loans.

Why Many Investors Avoid The HUD 221(d)(4) Loan Program

Some multifamily developers and investors shy away from HUD loans. Many feel there is a stigma attached to them. Others misunderstand the products, believing they are only for low-income and affordable housing projects. However, these things are not true. While HUD 221(d)(4) loans do take significantly longer to originate than many other kinds of multifamily construction loan options, and are more costly to originate, borrowers benefit from favorable leverage, interest-rates, and much more. This is especially the case if you work with an experienced intermediary who can guide you through each of the stages of the HUD 221(d)(4) application and approval process.


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