The U.S. Department of Housing and Urban Development has two special programs that insure mortgage loans for the new construction or substantial rehabilitation of multifamily rental or cooperative housing. These projects must be designed for moderate income families, the elderly or the disabled.
The programs are best known by their section names: 221(d)(3) is available for non-profit sponsors only. These entities may receive an insured mortgage up to 100% of the HUD/FHA estimated replacement cost for the project. Profit-motivated sponsors may quality for the 221(d)(4) mortgage insurance of up to 90% of the HUD/FHA estimated replacement cost for the project. This latter program will be the focus of this article.
The insured mortgages may be used to finance the construction or rehab of housing consisting of at least 5 units. They can be detached, semidetached, row, walkup or elevator-type rental or cooperative housing.
Many types of mortgagors can apply for this insurance, including builder-sellers, investor-sponsors, and general mortgagors.
The only restrictions on the type of families that are eligible to live in the resulting buildings are those of normal tenant selection. There are no income limits, and no provision that mandates Section 8 housing for the poor. Projects can be specifically designed for the elderly or the disabled, but don’t have to be.
Loan applicants generally work with a Multifamily Accelerated Processing (MAP) approved lender. The lender will create and submit the required documents in the pre-application stage. After the review by HUD, the borrower will be issued a “letter of invitation” if the presentation passes muster. It should be noted that the word Accelerated does not mean that this process will be fast. In fact, it will take many months, and that’s one reason many project directors first try to find funding from commercial lenders. However, on the plus side, 221(d)(4) loans are fixed, amortizing over 40 years, are non-recourse and assumable. These benefits can make it worthwhile to pursue such a program.
After receiving the go-ahead from HUD, the lender then submits the Firm Commitment application, which includes a full underwriting package. The regional HUD Multifamily Hub or Program Center will then consider the market analysis, zoning, architectural merits, capabilities of the borrower’s team and availability of community resources. If all these pieces suggest an acceptable level of risk, HUD will then issue a commitment to the lender for mortgage insurance.
In spite of all these requirements and hurdles, in 2008, HUD insured mortgages for 88 projects covering almost 14,000 units, for a total of $1 billion.
Read how our group is using the HUD 221(d)(4) program for a new apartment project in North Carolina. You may also be interested in our article on how to pool investor funds without running afoul of the SEC.
Related articles about mortgage lending:
- FHA Mortgage Loan Requirements Guide (bargaineering.com)
- Forget Fannie Mae and Freddie Mac – Meet Ginnie Mae! (homeloans.org)
- Big borrowers hit by falling values, skimpy lenders (lansner.freedomblogging.com)