Cost Certification: Proving Actual Costs at Final Endorsement

Key points

• Required for all insured multifamily projects except where the mortgage is 80% or less of value and the deal involves tax credits or is a 207/223(f) refinance.
• General contractors must also certify if there is a cost-plus contract or an identity of interest with the borrower.
• Certifiable costs are generally those paid in cash or to be paid within 45 days of final closing, with listed exceptions.
• 223(f) loans that are not exempt use a modified form, and line-item savings cannot offset overruns elsewhere.
• Approved certifications become final and incontestable absent fraud or material misrepresentation.

What cost certification is for

HUD sizes a construction or rehab loan partly on estimated costs. Cost certification replaces estimates with actuals. The MAP Guide states its purpose as establishing the borrower's actual costs, including the contractor's cost, and the maximum insurable mortgage for final endorsement. If actual costs are lower than the estimates that supported the loan, the insured mortgage can be reduced and the borrower must pay down the difference.

Certifiable costs are generally costs paid in cash or to be paid in cash within 45 days of final closing. The guide lists exceptions, including land value (which HUD calculates), general overhead, the builder's and sponsor's profit and risk allowance in identity-of-interest deals, and certain nonprofit developer fees.

Who has to certify

Under the MAP Guide, cost certification is required for all insured multifamily projects except where the mortgage is 80% or less of value and the deal either involves tax credits or is a refinance under Section 207/223(f). Where a 223(f) is not exempt, HUD uses a modified form of cost certification focused on the required repairs, and the guide notes that savings on one line item cannot offset overruns on another. Deferred repairs require a supplemental cost certification of their actual cost.

The general contractor and subcontractors must also certify if a cost-plus construction contract is used or there is an identity of interest with the borrower.

How the process runs

Disorganized records are the most common reason cost certifications drag. A project that kept clean files during construction can usually move from completion to final endorsement much faster than one rebuilding its records afterward.

• Track costs from day one in a format that maps to HUD's cost certification forms.
• Engage an independent CPA familiar with HUD cost certification before construction ends.
• Collect paid invoices, lien waivers, change order approvals and evidence of payment.
• Submit the certification and supporting documents through the lender to HUD.
• Respond to HUD's review comments and resolve any disallowed costs.
• HUD issues the maximum insurable mortgage, after which the loan proceeds to final endorsement.

Cost certification and bridge-to-HUD deals

Most bridge-to-HUD exits are 223(f) refinances or acquisitions, where the 80% of value exemption often applies. Sponsors should confirm early whether their deal will be cost certified, because it affects how repair work is documented. For deals that will certify, the repair escrow and any deferred repairs need to be tracked at the line-item level.

For predevelopment bridges that lead into a 221(d)(4), cost certification is the final step of the construction loan. Some predevelopment costs paid before the HUD closing may be includable if properly documented (confirm with the lender for the specific deal), so the bridge period is when good records start.

What borrowers should watch for

Identity-of-interest relationships between owner and contractor get extra scrutiny. Change orders without HUD approval may be disallowed. Payments to affiliates must be at arm's-length cost. And remember the incontestability rule cuts both ways: once HUD approves, the numbers are final unless there was fraud or material misrepresentation, so errors found later are hard to fix in the borrower's favor and misstatements remain a serious liability.

How it connects to other HUD terms

Cost certification is the gateway from initial endorsement to final endorsement on construction loans. It interacts with the working capital escrow and contingency, change orders under Davis-Bacon compliant contracts, and the repair escrow on 223(f) deals. It also determines whether any mortgage reduction is needed before the permanent loan is fully insured.

Where to go next

For construction loans where cost certification is standard, see HUD 221(d)(4) loans.

For Bravo's 223(f) terms and requirements, see HUD 223(f) loans.

Related guides: Predevelopment Bridge Loans Ahead of a HUD 221(d)(4); Value-add Renovation with a Bridge Loan, Then HUD 223(f); HUD Reserves and Repair Escrows: What Gets Funded at Closing.

Related terms: Final Endorsement: What It Means in a HUD Loan; Initial Endorsement: What It Means in a HUD Loan; Working Capital Escrow: HUD's Cushion for Construction Deals; Repair Escrow: How HUD Funds Deferred Repairs after Closing.

For portfolio figures by state, metro and program, see the HUD multifamily data hub. Bravo Capital’s record: all 26 HUD firm commitments received since April 2022 have closed, totaling $526.0 million (HUD Closing Scorecard).