What Are the Benefits of HUD 221(d)(4) Loans?
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 rehab financing.
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, 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% to 75% for fully amortizing, fixed-rate loans.
Why Some Investors Avoid HUD 221(d)(4) Loans
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 loans, and are more costly to originate, borrowers benefit from hugely 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.
To learn more about HUD multifamily loans, simply fill out the form below and a HUD lending expert will get in touch.
What are the advantages of HUD 221(d)(4) loans?
The HUD 221(d)(4) loan program offers several advantages for borrowers, including a 40-year loan term (plus 3 years for construction, for a total of 43 years), competitive fixed interest rates, non-recourse, and a high loan-to-value allowance of up to 90% for properties with significant rental assistance.
What types of projects are eligible for HUD 221(d)(4) loans?
HUD/FHA 221(d)(4) loans are eligible for the construction or substantial rehabilitation of multifamily rental or cooperative housing for moderate-income families, elderly, and the handicapped. These projects must have at least five residential units and can include mixed-use projects with commercial space. Source
Eligible projects for HUD 221(d)(4) loans include new construction, substantial rehabilitation, and moderate rehabilitation of multifamily rental or cooperative housing. Source
What are the requirements for HUD 221(d)(4) loans?
The requirements for HUD 221(d)(4) loans include a full scope of third party reports (environmental assessment, market study, appraisal, etc.), annual review, a bonded and licensed general contractor, and compliance with Davis Bacon wage requirements.
In addition, borrowers must have a maximum LTV of 85% for market-rate properties, 87% for affordable properties, and 90% for properties with 90% or more low-income units. A bonded, licensed, and insured general contractor must also execute a GMP contract.
What is the maximum loan amount for HUD 221(d)(4) loans?
The maximum loan amount for HUD 221(d)(4) loans is not limited. According to HUD 221(d)(4) Loans: What You Need to Know, there is no upper limit for the program, though particularly large loans are typically subject to stricter requirements. Additionally, HUD 221(d)(4) Loans states that the minimum loan amount is $4 million, and exceptions are made on a case-by-case basis. Generally, most 221(d)(4) construction loans are $10 million and above.
What is the interest rate for HUD 221(d)(4) loans?
Interest rates for HUD 221(d)(4) loans are fixed throughout the life of the loan (both construction and permanent stages) and determined at commitment by prevailing market conditions. 30 to 80-day rate lock commitments are available. An early rate lock feature is available, allowing the borrower to lock the rate after preliminary underwriting. There is a 1% rate lock deposit payable at the time of rate lock, to be refunded at closing. Source
How long does it take to get approved for a HUD 221(d)(4) loan?
The HUD 221(d)(4) loan process, from initial concept to final close, takes around 46 weeks on average. For a MAP one-stage application, the process will take about 5-7 months. For a MAP two-stage application, the process is more likely to take around 8-10 months. For more information, please see this page and this page.