No, the 221(d)(4) is not referring to something a stud Texas Tech quarterback would call out before being snapped the ball. (p.s. I’ll give you one guess where I went to school.)
It is, however, one of the HUD multifamily loan programs for “new construction or substantial rehab work of multifamily properties for moderate-income families, elderly and the handicapped,” according to the HUD website. It ensures the lender against any loss on mortgage defaults (i.e. it takes the risk out of the lender’s court).
There’s surprisingly very little info out there on the program, and the info that is out there isn’t the easiest to understand. Some may even have trouble finding out how to get commercial real estate loans like this.
As of today, I have not done any of the HUD multifamily loan programs, but I am considering the 221(d)(4) for my next purchase. So I thought I’d take some time to investigate more about it and speak to people who have first-hand experience with this program.
To get the scoop on the program I went to an expert. Brad Armstrong, president of Armstrong Mortgage Company, who has successfully originated over 50 221(d)(4) loans. I also talked to seasoned investors who are familiar with the program.
First, why the heck should you care about HUD multifamily loan programs, specifically the one mentioned at the start of this article? Glad you asked.
- Non-recourse loan (that’s necessary)
- Up to 40-year amortization (that’s…wow)
- Loan up to 83.3% of costs (uhhh…yes, please!)
So you can see the benefits are pretty compelling. Because it is non-recourse, the only way HUD can recoup losses should there be a mortgage default is to take back the property. Therefore, they are primarily looking at these two things:
- Will it actually be built? That means developer and team credibility and past experience is critical.
- Are the Pro Forma projections accurate? They want to make sure that, once it’s built, it will make money.
When talking to seasoned investors, some of them were against this HUD multifamily loan program due to some drawbacks. Here’s what they said.
- Takes a long time
- Lots of paperwork
- Expensive approval process
As with a lot of government programs, there is a lot of paperwork, and it is very time-consuming. It is essential, according to EVERYONE I spoke to, to have a HUD consultant. It should be someone who has gone through the process and knows the language and can guide a first-timer through how to get commercial real estate loans like this successfully.
The underwriting process is going to be 180 days total. 90 days for a soft commitment that basically says “yes, we like your project and it will be approved contingent on these stipulations.” And, 90 days for a firm commitment.
For each stage in the process of applying for the 221(d)(4) HUD multifamily loan program, soft and firm commitment, there is paperwork and reports that are required.
As far as it being an expensive approval process, there is an upfront, non-refundable fee when you apply for the program. That fee is 3/10 of a percent of the requested mortgage, and half of that is non-refundable. Additionally, during the construction phase, there is a fee of 45 basis pts to review construction. And, after construction is completed, there is an ongoing mortgage insurance premium fee that’s paid monthly of 65 basis pts.
One other thing to note, if you have investors, you will only be able to do cash distributions every 6 months or once a year because of the audits that are required under this program. Whereas, with other lenders, you might be able to distribute cash to investors monthly or quarterly.
My overall takeaway is that, if your project qualifies, then the 221(d)(4) HUD multifamily loan program is worth doing, as long as you have someone on your team you trust and has successfully gone through the process many times before. All the fees that are charged are outweighed by the advantages, and, in the end, you’ll come out with better returns.