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FHA/HUD 221(d)(4) Loans

Commercial Multifamily Financing By Fannie Mae
  • The HUD 221(d)(4) is a type of loan that is guaranteed by the U.S. Department of Housing and Urban Development (HUD). It is the highest leverage and typically the lowest costing loan option in the multifamily industry.
  • This loan program offers a number of key benefits, including being a non-recourse loan that offers a low fixed interest rate. That makes it one of the most attractive loan offers for multifamily housing development.
  • This is a type of FHA insured funding that offers a long-term loan with a fixed rate. It is available to be used on new construction properties or on substantial rehabilitation. The specific focus is on multifamily projects located throughout the country.

Conventional Loan Highlights

Loan Term: This is a two-phase loan. There is a construction loan period with an interest only loan. There is a 40 year permanent loan, that is fully amortizing.

Maximum Borrowed Amount: Three options exist, the maximum amount borrowed is determined by the lesser of:

  1. 85 percent of the eligible development costs in total, at market rate, or 87 percent for LIHTC restricted loans. For properties where there is at least 90 percent rental assistance, the maximum borrowed amount jumps to 90 percent. In this area, the development cost is made up of the land value for the new construction project as well as the current value (as-is value) of property for substantial rehabilitation.
  2. FHA mortgage statutory per unit limits are adjusted for the current local high cost factor -OR-
  3. The amount necessary to reach the minimum debt service conversation in several situations. It is 1.176x DSC for properties that are market rate. For LHITC restricted properties, it is 1.15X, and for properties with at least 90 percent rental assistance, it is 1.11x.
Eligible Borrowers: Borrowers must be a single asset entity in both nonprofit and for-profit investments.

Types of Eligible Property: The HUD 221(d)(4) is specifically for the new construction or the substantial rehabilitation of existing multifamily apartment properties. 

Non-Recourse: These are non-recourse loans for construction and permanent financing.

Underwriting Occupancy: The HUD 221(d)(4) terms require a maximum economic underwriting occupancy that depends on the situation. For market-rate properties, this is 93 percent, for LIHTC restrictions applied on 80 percent of the units at rents that are at least 10 percent under the market price, it is 95 percent. This jumps to 97 percent on properties with 90 percent rental assistance. 

Prepayment Penalty: Prepayment is typically 10 percent for year one, then it declines 1 percent per year after that point, though other prepayment options may be available in some situations and market conditions. 

Commercial Space: A maximum of 25 percent of gross floor area may be allotted to commercial space, and a maximum of 20 percent of effective gross income applies. This includes a 20 percent vacancy rate that applies.

Tax and Insurance Escrows: A monthly deposit for each is a requirement of the HUD 221(d)(4).

Good Faith Deposit: This is typically necessary but is based on the loan’s size and property type.

 Loans are subject to HUD approval and payment assumption fee.

Expense Escrow: This is required to cover the lender’s expenses and third-party report costs.

Rehabilitation Requirements:
The cost to rehabilitate the property must be higher than $15,000 per unit, which is adjusted for the current local high-cost factor, or it must be the replacement of at least two or more building systems

Origination Fee: This is dependent on the lender’s negotiation

HUD Application Fee: This fee is a 0.3 percent fee on the value of the loan that is nonrefundable. Of that, 0.15 percent of the borrowed amount is due at the time of pre-application submission for the HUD loan and the remaining at the firm application (this is a two-phase application process)

HUD Inspection Fee: There is a quired 0.5 percent fee based on the borrowed amount for new construction properties, and the same applies to the borrowed amount for substantial rehabilitation properties

HUD Mortgage Insurance Premium: Application of rates applies based on the type of property, which is 0.65 percent for market-rate properties, 0.35 percent for Affordable properties, and .025 percent for energy efficient properties and Broadly Affordable properties.

Advantages of FHA/HUD 221(d)(4) Loans

There are numerous benefits to the HUD 221(d)(4). Some of those benefits include:

  • Non-Recourse: Investors do not need to provide a personal guarantee to obtain the loan, which reduces the risk to the developer significantly. If the mortgage loan enters default, the lender is not able to pursue the personal assets of the investor or developer to repay the borrowed amounts.
  • Loan-To-Value (LTV): High LTV, meaning developers will be able to get started with less money invested. For the HUD 221(d)(4) loans, properties may have an 85 percent LTV for market-rate properties, while Affordable Properties can have an 87 percent LTV and properties for low-income units (rental assistance properties) can be obtained with a 90 percent LTV.
  • Interest Rates: Because these loans offer a fixed rate, that helps to provide more of a consistent level of funding, which means required payments will not go up or down during the loan term. Additionally, these loans have a 640 percent maximum term with that fixed rate which makes them an attractive option.

Disadvantages of FHA/HUD 221(d)(4) Loans

There are a few disadvantages to consider:

  • Application Fee: There is a nonrefundable application fee associated with these loans
  • Minimum Loans: While loans are flexible in size, the minimum amount borrowed is $4 million.

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Can these HUD loans be used for LIHTC properties?

It is possible to use these multifamily loans with the Low Income Housing Credit (HIHTC) property that is designed for affordable properties. Doing so can help to save investors money by providing a 10 year tax deduction.

Are there income limits on hud 221d4 terms?

There are no income limits, but these loans are typically used to create moderate-income housing, handicapped resident property, and elderly residential housing. 

What is the maximum amount allowable under HUD 221(d)(4)?

Unlike other loans, there is no maximum borrowed amount, and these loans are typically used for properties over $15 million in value. HUD 221d4 terms may vary.

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