What Is a HUD Section 221(d)(4) Loan?

Key points

• One insured loan covers construction and the permanent period under insurance of advances, or the permanent period only under insurance upon completion.
• MAP Guide sizing: 85 percent of replacement cost and a 1.176 DSCR for market rate, rising to 90 percent and 1.11 for properties with 90 percent or more rental assistance.
• A working capital escrow of 4 percent of the mortgage (new construction) or 2 percent (substantial rehabilitation) and an initial operating deficit escrow are required.
• Market rate deals usually go through a concept meeting and pre-application before the firm application.
• Cost certification at completion can reduce the finally endorsed loan.

What 221(d)(4) finances

The program covers new construction, where no construction work has been done on the site before initial endorsement, and substantial rehabilitation of existing properties that are or have been occupied, including conversions from nonresidential to residential use. Projects whose above-ground construction was started but never completed or occupied are not eligible as substantial rehabilitation. Properties must have five or more units, each with its own full kitchen and bath. Substantial rehabilitation is defined by a per-unit rehab cost threshold described in Chapter 5 of the MAP Guide.

HUD can insure both construction and permanent periods (insurance of advances) or only the permanent loan after completion (insurance upon completion). Davis-Bacon requirements apply in both cases.

How a 221(d)(4) loan is sized

Instead of appraised value, the main leverage test is a percentage of HUD's estimated replacement cost. Under the March 2021 MAP Guide, market rate projects size to 85 percent of replacement cost and 85 percent of NOI (1.176 DSCR); affordable projects with tax credit rents at least 10 percent below market to 87 percent and 1.15; and projects with 90 percent or greater rental assistance to 90 percent and 1.11. Statutory per-unit limits, adjustable in high-cost areas, also apply. For substantial rehabilitation, the cost basis includes the property's as-is value, tested against any acquisition price. Confirm current levels under HUD guidance.

Escrows, absorption and lease-up

Construction risk is handled with required escrows rather than recourse.

• Working capital escrow: 4 percent of the mortgage for new construction (2 percent as construction contingency and 2 percent for excess soft costs and start-up), and 2 percent for substantial rehabilitation.
• Initial operating deficit escrow: required for new construction and many substantial rehabilitation deals to cover expenses and debt service during lease-up; it is not mortgageable, and unused amounts return to the borrower.
• Absorption: projected lease-up should not exceed 18 months from delivery of the first units, except for large high-rises with HUD approval.
• Marketing and leasing plan: required, with a budget confirmed by the management company.
• Assurance of completion: a payment and performance bond, cash or letter of credit from the general contractor.

The 221(d)(4) process

Concept meetings are strongly encouraged for market rate deals. The pre-application lets HUD test market demand and feasibility; if HUD issues an invitation letter, the firm application must follow within 120 days, with a possible extension. For market rate deals, half the application fee is due with the pre-application. After the firm commitment, initial endorsement starts construction, HUD approves the initial and final draws, the lender approves interim draws, and HUD inspects monthly. Amortization begins four months after the scheduled completion date for insurance of advances loans. At completion, an independent CPA cost certification and final endorsement close out construction.

Where bridge financing fits

Bridge capital typically appears ahead of a 221(d)(4) rather than behind it: acquiring land or an obsolete building, funding design, entitlements and third-party reports, and carrying the site until HUD closing. The MAP Guide limits how such debt is treated. Bridge loans secured by the property are acceptable for insurance upon completion and must be repaid at the permanent closing or converted into permitted secondary financing, and debt intended to inflate the insured mortgage is not recognized in the cost basis. Work performed after the HUD application is filed but before closing is an early start that requires HUD approval.

For existing buildings, compare the 221(d)(4) path with a bridge-financed renovation followed by a 223(f). The 221(d)(4) offers longer amortization and construction financing but brings Davis-Bacon, cost certification and a longer process.

Where to go next

For Bravo's 221(d)(4) terms and requirements, see HUD 221(d)(4) loans.

For predevelopment and bridge capital ahead of a HUD construction loan, see bridge-to-HUD financing.

Related guides: HUD 223(f) vs. 221(d)(4): Which Exit Fits the Property?; Predevelopment Bridge Loans Ahead of a HUD 221(d)(4); From Lease-up to HUD 223(f): Financing a Newly Built Property.

Related terms: Davis-Bacon Prevailing Wages on HUD-Insured Loans; Final Endorsement: What It Means in a HUD Loan; Working Capital Escrow: HUD's Cushion for Construction Deals; Substantial Rehabilitation: When Repairs Become a HUD Rehab Loan.

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).