HUD 221(d)(4) Loan: Step-by-Step Guide for Apartment Builders

Private capital still loves multifamily, yet high rates and lender selectivity press new entrants. One federal program keeps cranes moving: HUD’s Section 221(d)(4) construction-to-permanent loan. It blends a government guarantee, high leverage, and a 40-year fixed coupon into one closing. The walkthrough below shows how to secure it and keep the deal on schedule.

Why Builders Pay Attention

• Highest leverage in the agency universe - traditional banks cap LTC near 65%.

• Non-recourse beyond standard carve-outs, protecting the balance sheet.

• Assumable loan at minimal cost, creating exit liquidity for future buyers.

• Rate lock before the first footing; volatility during an 18-month build no longer eats equity.

Seven Practical Steps From Idea to Permanent Debt

Stage	Key Actions	Typical Calendar
1.Concept & Feasibility	Land control, preliminary pro forma at qualifying DSCR, outline construction budget.	Month 0
2.Engage a MAP-Approved Lender	Select a shop with recent d4 closings; schedule a pre-application call with the local HUD office.	Month 1
3.Third-Party Reports	Order market study, environmental phase I, appraisal, architecture & cost review.	Months 1-3
4.Pre-App Submission (or MAP Fast-Track)	Lender forwards package; HUD issues a concept letter outlining deal parameters.	Month 4
5.Firm Commitment	Final plans, specs, GMP contract, and updated financials delivered. HUD underwrites and issues the commitment.	Months 5-8
6.Closing & Construction	Borrower posts working-capital, property insurance, and the first MIP; loan endorses and interest-only draws start.	Months 9-11
7.Cost Certification & Final Endorsement	Independent CPA verifies project costs; upon stabilization the note automatically converts to a 40-year amortizing term.	Month 36±

The median timeline runs 11-12 months from concept call to ground breaking; MAP Fast-Track can cut that nearly in half for well-qualified sponsors.

Budget Items That Surprise First-Timers

• Working-Capital Escrow - four % of the loan, released after break-even.

• Initial Operating Deficit Reserve - sized to cover the first leasing year.

• Bondable Insurance During Build - required even if the GC carries sizable coverage.

• HUD Exam Fee - 0.30% of the loan at closing.

• Mortgage Insurance Premium - one-time and annual (see table).

Green building certification (Energy Star score ≥ 75) trims annual MIP to 25 bps, raising debt capacity by roughly two points of LTC while lifting cash-on-cash post-stabilization.

Underwriting Tips That Tilt the Decision in Your Favor

1. Right-Size Rents Early - HUD applies a 93% economic occupancy ceiling for market-rate underwriting and stricter caps for assisted-rent deals.

2. Document Contractor Experience - three comparable projects within the past five years win credibility.

3. Lock Project Costs - a fully executed GMP contract lowers contingency requirements.

4. Demonstrate Liquidity - lenders look for cash equal to at least five % of hard and soft costs after the equity check.

5. Model Higher Taxes - property-tax underwriting often uses stabilized value rather than the pre-construction assessment.

Common Stumbling Blocks

• Market study fails the absorption test. Revise unit mix or add concessions budget.

• Environmental red flags. Phase II delays can derail the 180-day rate lock; budget for extra time.

• Cost overruns during build. The loan converts at final endorsement; unbudgeted expenses require cash in, not extra loan dollars.

• Change orders above two % of hard costs. HUD may request a second cost review.

Strategizing the Exit

The 221(d)(4) note may be assumed by a buyer meeting HUD credit standards. A pre-payment lockout parallels GNMA securitization - currently two year lockout plus declining step-down penalty, but secondary market premiums often offset that cost. For sponsors targeting a merchant-builder model, an assumption pathway helps limit defeasance or yield-maintenance expense.

HUD 221(d)(4) debt carries paperwork and patience, yet the blend of high leverage, long amortization, and federal credit support can tilt a pro forma from marginal to compelling. With the roadmap above and a lender fluent in HUD’s playbook, a first-time multifamily builder can align public finance with private ambition, stack capital efficiently, and deliver apartments that pencil from day one.

Credit: (Multifamily Loans, HUD Loans, Janover)

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