HUD 221(d)(4) Terms, Qualifications & Guidelines

Eligible Properties

Detached, semi-detached, row homes, walkup, and elevator-type multifamily properties are all eligible for HUD multifamily construction loans. This includes market rate and low-to-moderate income housing, subsidized affordable housing properties, and multifamily, cooperative housing projects with a minimum of 5 units.


Commercial Space Limitation

Commercial and/or retail space is limited to 25% of the property’s net rentable area and 15% of the property’s underwritten effective gross income (up to 30% of underwritten EGI permitted in urban renewal areas under Section 220).


Eligible Borrowers

Single-asset, bankruptcy-remote, nonprofit or for-profit entities are among the groups eligible for HUD 221(d)(4) financing. 


Use of Proceeds (Substantial Rehabilitation) 

Properties must meet one of the following requirements before qualifying as a substantial rehabilitation of a multifamily property. In particular, replacements, repairs, and improvement costs for an existing property must be more than:

  • 15% of the property’s replacement cost after of all work is completed OR

  • $6,500 per unit as adjusted by the local HUD office OR

  • The cost of replacing two or more buildings, regardless of project cost


Maximum Loan Amount 

This is determined by the lowest of the following:

  • 90% of the eligible development costs (100% for non-profit)

  • 1.11x Debt Service Coverage (1.05x for non-profit)


HUD’s Statutory Mortgage Limits 

For rehabilitation, add 90% of the “as is” value (100% for non-profit) plus 90% of the total development cost (100% for non-profit)



Leverage is an investment strategy which uses borrowed money to finance an asset and increase the return. It also refers to the amount of debt used in financing assets. Borrowers use the asset to be purchased as collateral. Lenders often set limits on how much leverage is allowed. HUD multifamily construction financing offers the following leverage:

  • 83.3% LTC (Loan-to-cost Ratio)* or replacement cost, 83.3% of net operating income, or 1.20 Debt-Service Coverage Ratio (DSCR)** for market rate properties

  • 87% LTC or replacement cost, 87% of net operating income, or 1.15 DSCR for affordable housing properties

  • 90% LTC or replacement cost, 90% of net operating income, or 1.11 DSCR for rental assistance properties”

* The LTC (Loan-to-cost Ratio) compares a project’s financing to the cost of construction. 

** The DSCR is the cash flow required to pay current debts (interest, principal and lease payments). It is used by lenders to determine loans on income properties. 



Certain funds are held by a third party in escrow until the final transaction is completed:

  • In accordance with HUD guidelines, replacement reserves are required.

  • After construction is completed, taxes and insurance are escrowed monthly.

  • Requires a working capital reserve account equal to 4% of the FHA-insured loan (paid either in cash or with an LOC (letter of credit)). The unused amount is later refunded.

  • Operating deficit reserves must be equal to 3% of the loan. Any unused amount is later refunded.


Fees & Expenses

The HUD application fee is 0.30% ($3 per thousand of the requested mortgage amount). The HUD inspection fee is 0.5% of the mortgage amount (for new construction - $5 per thousand of the mortgage amount; for substantial rehabilitation - $5 per thousand of the improvement costs). Borrowers are also responsible to pay for all third party reports like the HUD Multifamily Appraisal, Market Study and Phase 1 Environmental Site Assessment


MIP (Mortgage Insurance Premium)

An annual Mortgage Insurance Premium. Beginning at closing, it is paid for each year of construction and then each following year thereafter. MIP for multifamily loans is:

  • 65 basis points for market rate properties

  • 45 basis points for Section 8 projects or new money LIHTC properties

  • 70 basis points for Section 220 urban renewal non-Section 8 or LIHTC projects

  • 25 basis points for properties qualifying for a green MIP reduction


Term & Amortization


During the construction phase, HUD multifamily construction loans are both fixed-rate and interest-only for up to 36 months. After this, there is an additional 40 years of fully amortized, fixed-rate payments. Altogether, these HUD loans have a maximum term of 43 years.


Interest Rate

Interest rates fluctuate depending on market conditions. As a result, a definitive interest rate cannot be given.  



All loans are non-recourse to the key principals, both during construction and during permanent financing. This is subject to standard carve-outs.



All FHA 221(d)(4) loans are fully assumable, but are subject to FHA approval along with a 0.05% fee of of the original FHA-insured loan amount. 



10 years of call protection with a 2 year lockout. This is followed by a step down from 8%. If the loan is assumed, there is no prepayment penalty.


Replacement Reserves

HUD requires annual replacement reserves. This is money set aside to replace equipment and components which wear out over time. In some cases, HUD may waive this requirement if calculations exceed $500 per door. HUD requires the following replacement reserves equal to the greater of:

  • 0.60% of the total cost for new construction or 0.40% of the loan amount for substantial rehabilitation projects

  • $250 per unit per year



FHA multifamily construction financing applications have either a two or one-stage process:

  • For market rate property applications, there is a two-step process, pre-application followed by the firm application.

  • For affordable and rental assistance properties, they may use MAP (Multifamily Accelerated Processing) one-stage processing.



Processing HUD 221(d)(4) financing applications typically takes from 5 to 7 months for a MAP one-stage application. Processing a MAP two-stage application can take between 8 to 10 months. Check out our typical loan timetable to learn more.