MIP: Mortgage Insurance Premiums in Relation to HUD 221(d)(4) Loans
Just like a borrower who takes out a private real estate loan has to pay private mortgage insurance (PMI), a developer who takes out an FHA multifamily construction loan has to pay a mortgage insurance premium (MIP). While the FHA doesn't make a profit on its loans, it still has to protect itself against unforeseen losses, such as a borrower defaulting on their mortgage.
MIP and HUD Multifamily Construction Loans
Just as a borrower who takes out a private real estate loan has to pay private mortgage insurance (PMI), a developer who takes out an FHA multifamily construction loan has to pay a mortgage insurance premium (MIP). While the FHA doesn't make a profit on its loans, it still has to protect itself against unforeseen losses, such as borrowers defaulting on their mortgages.
FHA MIP for Multifamily Loans Declines Over Time
For HUD multifamily financing, like the HUD 221(d)(4) program, MIP lasts for the life of the loan, and is set at a fixed rate. However, as a borrower pays off the principal balance of their loan, the amount of MIP they’re required to pay declines as well.
FHA MIP Can Vary Based on Property Type
Right now, the MIP rate for HUD 221(d)(4) loans is 0.65% for market rate properties, 0.45% for Section 8 or LIHTC (low-income housing tax credit) properties, and 0.70% for Section 220 urban renewal projects (those that aren't already Section 8 or LIHTC.) However, developer/owners who make their building energy efficient can qualify for a green MIP reduction, as long as they score high enough on Energy Star's Statement of Energy Design Intent (SEDI) assessment.
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What is the difference between a HUD 221(d)(4) loan and a conventional loan?
The main difference between a HUD 221(d)(4) loan and a conventional loan is that HUD 221(d)(4) loans are specifically designed for the construction and substantial rehabilitation of multifamily properties, while conventional loans are typically used for the purchase of existing properties. HUD 221(d)(4) loans also have a longer term length, at 40 years (plus a three-year, interest-only construction period), when compared to conventional loans, which typically have a maximum term length of 30 years. In addition, HUD 221(d)(4) loans have a higher minimum loan amount, at $2 million, compared to conventional loans, which typically have a minimum loan amount of $500,000. Finally, HUD 221(d)(4) loans can take significantly longer to close; up to 11 months for loans processed through TAP (Traditional Application Processing), while conventional loans can usually be closed within 30-45 days.
For more information, please see this article.
What are the benefits of a HUD 221(d)(4) loan?
The HUD 221(d)(4) loan program offers 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.
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. However, with a HUD 221(d)(4) loan, investors and developers can access the same long-term, fixed-rate financing for both the construction and post-construction period, all in one loan.
What are the requirements for a HUD 221(d)(4) loan?
The requirements for a HUD 221(d)(4) loan 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. Additionally, 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 a HUD 221(d)(4) loan?
The maximum loan amount for a HUD 221(d)(4) loan is not limited. According to Apartment Loans, the minimum loan amount is $4 million, but exceptions are made on a case-by-case basis. Generally, most 221(d)(4) construction loans are $10 million and above.
What is the mortgage insurance premium (MIP) for a HUD 221(d)(4) loan?
The mortgage insurance premium (MIP) for a HUD 221(d)(4) loan is 65 basis points for market-rate properties, 45 basis points for Section 8 or new-money LIHTC properties, and 70 basis points for Section 220 urban renewal projects that are not Section 8 or LIHTC. An MIP of 25 basis points is available for properties that qualify for a Green MIP reduction.
How long does it take to close a HUD 221(d)(4) loan?
The HUD 221(d)(4) Loan: TIMING One-stage applications for affordable and rental assistance properties generally take 5 - 7 months to close, whereas two-stage applications for market-rate properties generally close in 8 - 12 months, subject to deal specifics.
Typical Timetable for the FHA 221(d)(4) Loan: The Closing Process Once the final title and survey documents have been received, the lender and borrower will work together to finish drafting their closing documents and submit them to HUD (usually around week 41.) Around week 44, HUD will issue comments to draft closing documents. Then, the lender's and owner's attorneys will work with HUD to schedule a closing date. Finally, by week 46 (on average), the closing documents will be finalized and the loan will close.
On average, it takes 8 - 12 months to close a HUD 221(d)(4) loan.