HUD 221(d)(4) Frequently Asked Questions
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Market Rate vs. Affordable Properties in Relation to HUD 221(d)(4) Loans
One of the biggest questions that developers need to ponder before starting a HUD 221(d)(4) financed project is whether to include any affordable housing. Since a developer's goal is (naturally) to maximize profit, the obvious answer would be no. However, there are a variety of advantages to including at least some affordable units in a HUD multifamily construction loan project.
Large HUD 221(d)(4) Loans: What You Need to Know
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.
What are the Pros and Cons of HUD 221(d)(4) Loans?
What are the pros and cons of HUD 221(d)(4) loans? It's a great question, since these HUD multifamily construction loans are incredibly attractive to a variety of developers and investors.
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.
LTC: Loan-to-Cost Ratio in Relation to HUD 221(d)(4) Loans
When looking at traditional, single-family residential loans, loan-to-value ratio (LTV) is often one of the most important factors to examine. However, when we look at HUD multifamily construction loans, like the HUD 221(d)(4) loan, and other similar types of financing, loan-to-cost ratio (LTC) also becomes an important factor.
BSPRA: Builder Sponsor Profit & Risk Allowance in Relation to HUD 221(d)(4) Loans
BSPRA, or Builder Sponsor Profit & Risk Allowance, is an additional 10% FHA 221(d)(4) loan credit, sometimes referred to as "paper equity," that can be added to the calculated replacement cost of the property. Specifically, BSPRA is calculated by taking 10% of the "hard costs" of the project, which does not including the land, and adding that to the total development costs.
How do I apply for FHA multifamily construction loans/financing?
If you're interested in getting financing to construct or renovate a multifamily residential property, getting an FHA/HUD 221(d)(4) loan can be one of the most cost effective ways to do so. But, to get an FHA/HUD 221(d)(4) loan, you'll need to do significant preparation.
Are HUD Multifamily Construction Loans Assumable?
If you take out an HUD loan to build a multifamily property and want to sell it, can the new owner simply take on your existing mortgage? The answer is yes-- as long as they get approval from the FHA.
Does FHA multifamily construction financing place limits on rehabilitation work?
If you're considering applying for a FHA/HUD 221(d)(4) loan to rehabilitate a multifamily property, it's important to realize that there minimum FHA/HUD multifamily project size limits that must be met. Otherwise, the project won't be considered large enough to be eligible for the loan.