Explaining the 221(d)(4) Loan Program in Plain English

2..21. D, 4. SET. HUT…HUT, HUT.

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, a HUD loan program for “new construction or substantial rehab work of multifamily properties for moderate-income families, elderly and the handicapped” according to the HUD website. It insures 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. As of today I have not done one but I am considering it 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 the program? 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:

  1. Will it actually be built? Therefore developer and team credibility and past experience is critical.
  2. Are the Pro Forma projections accurate? They want to make sure that once it’s built it will make money.

As far as the drawbacks, when talking to seasoned investors some of them were against the program. 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 it 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, soft and firm commitment, there is paperwork and reports that are required.

You can download the soft commitment checklist here. And firm commitment checklist here.

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. (definition of basis pts can be found here)

One other thing to note, if you have investors you will 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.

The verdict?

My overall takeaway is that if your project qualifies then the 221(d)(4) 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.