While we mentioned in the loan facts section of this website that the minimum HUD 221(d)(4) loan is $2 million, and there is no upper limit, the reality can be a little bit more complex. While there technically is no financial ceiling for the program, particularly large loans are typically subject to stricter requirements, especially those involving DSCR and LTC.
If you're considering getting an FHA multifamily construction loan to build an age-restricted or senior community, it's important to understand what this type of loan does and does not allow. First, let's define "senior community"-- in the eyes of FHA/HUD, that means any community for individuals 62 years and older.
A Capital Needs Assessment (CNA), sometimes referred to as a Physical Needs Assessment (PNA) is a type of report that can help owners and developers understand how much it will cost to maintain their project over time. That way, owner/developers, lenders, and property management can work together to develop a smart budget, and can also create estimates of the life of various systems in the building (i.e. plumbing, electrical, insulation, etc.)
One of the parts of the HUD loan application and approval process is getting a HUD seismic assessment, which is needed if your HUD 221(d)(4) project is located in seismic zones 3 or 4. Seismic zones 3 and 4 (based on 1997 UBC seismic zone maps) are generally located in areas including all of California, large amounts of Alaska and Hawaii, some Oregon, Washington, and Nevada, and a small amount of Tennessee, Kentucky, Illinois, and Arkansas.
While FHA MIP is usually less expensive than the private mortgage insurance one would pay on a privately-insured loan, it can still get expensive. Fortunately, HUD is now allowing investors and developers to reduce their MIP payments to 0.25%, provided they make energy efficient improvements to their project.
Loan-to-value ratio (or LTV) is an assessment of risk that lenders use to determine the viability of a loan. Loans with higher LTVs are considered riskier, and therefore often have higher interest rates. Lenders believe that borrowers who have loans with higher LTVs have a greater likelihood of defaulting on their mortgages because of the lack of equity within the property. However, a higher LTV allowance means that investors and developers can get a sizable loan with less cash down.
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.
If you're considering building or renovating a multifamily residential property with a HUD/FHA 221(d)(4) loan, you might be wondering if it restricts or limits the kinds of residents that can live in the development. And, in pretty much every case, the answer is no.