Final Endorsement: What It Means in a HUD Loan

Key points

• Final endorsement closes out the construction phase of a 221(d)(4), 220, 231 or construction-type 241(a) loan.
• The borrower's independent CPA cost certification can reduce the finally endorsed mortgage if actual costs come in lower than estimated.
• MIP collected between initial and final endorsement is reconciled at final endorsement.
• The general contractor must provide a latent defects assurance, such as a 2.5 percent cash escrow held for 15 months or a letter of credit.
• Unpaid obligations disclosed by the borrower must be covered by the final advance or by additional funds HUD approves.

What final endorsement is

A construction loan insured with insurance of advances goes through two endorsements. At initial endorsement HUD insures the loan and the first advance; during construction, HUD insures each monthly advance as it is drawn. Final endorsement is HUD's endorsement of the note for the final mortgage amount once construction is complete and accepted. It is the last step before the loan settles into ordinary servicing and asset management.

For an insurance upon completion loan, where HUD does not insure construction advances, final endorsement is the first time HUD insures the loan, and the MAP Guide states that amortization begins on the first day of the second month after final endorsement. For insurance of advances loans, amortization is scheduled to begin four months after the estimated construction completion date in the firm commitment.

Cost certification and mortgage reduction

The MAP Guide requires the borrower to submit a cost certification prepared by an independent certified public accountant after construction or substantial rehabilitation. General contractors must also certify costs when a cost-plus contract is used or when there is an identity of interest with the borrower. HUD reviews the certified costs, and the mortgage that is finally endorsed can be reduced if the cost-based sizing criterion now produces a lower number. This is why construction budgets for HUD deals are carried at real cost: savings are not the borrower's to keep if they reduce the cost basis below what the original loan assumed.

For 223(f) refinances there is a modified cost certification before the combined initial/final closing, and if non-critical repairs were escrowed, a supplemental cost certification for those deferred repairs is due within 15 days after they are complete.

What HUD reviews at final closing

The lender prepares the Request for Final Endorsement of Credit Instrument, form HUD-92023M. HUD compares it with every application for insurance of advance (form HUD-92403) to confirm the totals match, and reconciles it with the title evidence.

• Borrower and general contractor certifications disclosing all unpaid obligations for land, construction and soft costs.
• Coverage of any unpaid obligations that exceed the final advance, through an escrow deposit or another assurance HUD approves.
• Davis-Bacon labor standards clearance for final closing on projects subject to prevailing wages.
• The maximum insurable mortgage (form HUD-92580), stating whether any escrow must be established.
• Latent defects assurance from the general contractor: a cash escrow of 2.5 percent of construction cost held for 15 months, or an equivalent letter of credit.

Premium reconciliation and property insurance

MIP during construction is collected as a capitalized amount at initial endorsement, then reconciled at final endorsement against what was actually due. Property insurance also transitions: once construction is accepted, the lender must deliver evidence of permanent coverage with no gap from the builder's risk and construction-period policies. When onsite construction reaches 80 percent, the lender prepares the property insurance schedule and requirements for the completed structures.

What borrowers should watch for

Delays to final endorsement are usually documentation problems rather than physical ones. Lien waivers that do not match payments, change orders that were never approved, unresolved payroll issues under Davis-Bacon, and disputes with subcontractors over retainage are common causes. Borrowers using a predevelopment bridge loan ahead of a 221(d)(4) should keep in mind that work performed before HUD involvement still has to be documented for the cost basis, and that the bridge must be repaid or converted into permitted secondary financing at the permanent loan closing.

Plan for the lease-up and operating period in parallel. Final endorsement concerns construction and cost, but the operating deficit escrow funded at initial endorsement continues to protect debt service until the property reaches sustaining occupancy.

Where to go next

For Bravo's construction and substantial rehabilitation program, see HUD 221(d)(4) loans.

To discuss a construction-to-permanent HUD loan with Bravo, use the Bravo loan inquiry.

Related guides: HUD 223(f) vs. 221(d)(4): Which Exit Fits the Property?; Predevelopment Bridge Loans Ahead of a HUD 221(d)(4); After the HUD Closing: Asset Management Obligations.

Related terms: Initial Endorsement: What It Means in a HUD Loan; Cost Certification: Proving Actual Costs at Final Endorsement; What Is a HUD Section 221(d)(4) Loan?; Davis-Bacon Prevailing Wages on HUD-Insured Loans.

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).