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.
HUD 221(d)(4) Pros and Cons
What are the pros and cons of HUD 221(d)(4) loans? It's a great question, especially since these HUD multifamily construction loans are incredibly attractive to a variety of developers and investors.
HUD 221(d)(4) Cons
Somewhat lengthy application and approval process (46 weeks avg.)
Involves a lot of paperwork and documentation
Approval fees can be expensive
High leverage/LTV Allowance
- 40-year term (43-year including construction)
Non-recourse loan protects developers and investors from excessive financial risk
What are the benefits of HUD 221(d)(4) loans?
HUD 221(d)(4) loans offer 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.
What are the drawbacks of HUD 221(d)(4) loans?
The drawbacks of HUD 221(d)(4) loans include a somewhat lengthy application and approval process (46 weeks on average), a lot of paperwork and documentation, approval fees that can be expensive, and a 40-year term (43-year including construction).
For more information, please see this page.
What are the eligibility requirements for HUD 221(d)(4) loans?
The eligibility requirements for HUD 221(d)(4) loans include a maximum Loan-to-Value (LTV) ratio of 85% for market-rate properties, 87% for affordable properties, and 90% for properties with 90% or more low-income units. Additionally, a bonded, licensed, and insured general contractor must execute a GMP contract. The loan must also undergo an annual review and be in compliance with Davis Bacon wage requirements.
What types of projects are eligible for HUD 221(d)(4) loans?
HUD/FHA 221(d)(4) loans are eligible for the construction or substantial rehabilitation of multifamily rental or cooperative housing for moderate-income families, elderly, and the handicapped. These projects must have at least five residential units and can include mixed-use projects with commercial space. The loan can also be used to refinance existing HUD-insured loans. Source
What are the interest rates for HUD 221(d)(4) loans?
Interest rates for HUD 221(d)(4) loans are fixed throughout the life of the loan (both construction and permanent stages) and determined at commitment by prevailing market conditions. 30 to 80-day rate lock commitments are available. An early rate lock feature is available, allowing the borrower to lock the rate after preliminary underwriting. There is a 1% rate lock deposit payable at the time of rate lock, to be refunded at closing. More information about HUD 221(d)(4) loans.
What are the terms of repayment for HUD 221(d)(4) loans?
HUD 221(d)(4) loans have terms including:
- Loan Term: 40 years (+3 year construction term, for 43 years total)
- Loan Size: $2 million+
- Leverage: 85% LTV (Loan-to-Value Ratio) for market rate, 87% for affordable, 90% for rental assisted properties
- Interest Rates: Fixed
- Recourse: HUD 221(d)(4) loans are non-recourse with standard bad-boy carve-outs
- MIP: 0.65% for market rate, 0.45% for Section 8/LIHTC properties, 0.25% for projects with Green MIP Reduction
HUD 221(d)(4) Pros
Why HUD Multifamily Construction Loans Remain Attractive for Many Developers
While getting a HUD multifamily loan can take time, effort, and a bit of upfront investment, most developers find that there's really nothing else like it on the market. Very few other loan options can offer the low interest rates, long loan terms, high LTV allowances, and other features that make HUD 221(d)(4) loans a fantastic choice for so many multifamily developments.
To learn more about how a HUD 221(d)(4) loan can help finance your multifamily development, fill out the form below and a HUD loan expert will get in touch.