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.
If you're interested in getting a HUD 221(d)(4) loan, you'll likely have to do a lot of communication with your local HUD multifamily center. While your lender may do much of the coordination and communication with you (and/or for you), it may still important to for you to reach out your local HUD multifamily center with questions or concerns about the HUD multifamily construction loan process.
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.
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.
The Federal Housing Administration (FHA), founded in 1934, is a U.S. government agency under the U.S. Department of Housing and Urban Development (HUD). The main purpose of the FHA is to insure residential real estate loans. While many of the FHA's loans focus on individual homebuyers, the FHA also provides loans for multifamily builders and developers, including it's popular HUD 221(d)(4) loan program.
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.
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.
The U.S. Department of Housing and Urban Development, otherwise known as HUD, is a U.S. government agency intended to make it easier for Americans to find housing at an affordable rate. Founded in 1965, the agency incorporated the Federal Housing Administration (founded in 1934) as one of it's sub-agencies.
The Government National Mortgage Association, otherwise known as Ginnie Mae, issues mortgage-backed securities, which are "backed by the full credit and faith of the U.S. government." These are based on FHA loans, which include HUD/FHA 221(d)(4) loans, as well as loans issued by the Department of Veterans Affairs (VA).
If you're a builder or developer interested in taking out a FHA/HUD 221(d)(4) loan to construct or rehabilitate a multifamily development, understanding what interest rate you might be paying is essential to your financial decision making process. After the preliminary underwriting on your loan is complete, a 30 to 180 day rate lock is available. However, it's subject to a 1% rate lock deposit payable which is refunded at closing.
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.
If you're looking to construct or renovate a multifamily real estate project using a HUD/FHA 221(d)(4) loan, how do you need to structure your company to be eligible for a loan? In most cases, HUD/FHA 221(d)(4) loan borrowers should be structured as single-asset/single-purpose, bankruptcy-remote entities, which can be owned or operated by nonprofit or for-profit groups.
If you're interested in building multifamily housing, a HUD 221(d)(4) loan can be a great way to finance your project. But who is eligible to build a project with a HUD 221(d)(4) loan? Well, as long the borrower/developer has requisite experience and financial credentials, and HUD approves the project, almost any reputable organization or individual is edible for an FHA 221(d)(4) loan for multifamily construction.