Multifamily
HUD 221(d)(4) Construction and Substantial Rehab Loans
Section 221(d)(4) finances new construction and substantial rehabilitation of apartments with one loan. The rate is fixed at closing for construction and up to 40 years of amortization, the loan is non-recourse, and market-rate projects can borrow up to 87% of HUD's estimate of total cost.
Key terms
| Term | Section 221(d)(4) |
|---|---|
| Eligible projects | New construction with no site work before closing, or substantial rehabilitation of existing buildings, including conversions of non-residential buildings. 5 or more units, each with its own kitchen and bath |
| Maximum loan | The lowest of: 87% of HUD's estimated replacement cost (90% for affordable, rent-assisted and Middle Income projects); the amount supported by a 1.15 DSCR (1.11 for those categories); HUD's statutory per-unit limits |
| Cash out | None. The loan is sized to cost |
| Term | Up to 40 years after construction, or 75% of remaining economic life if less. Interest during construction is included in the loan |
| Rate | Fixed at closing for the construction and permanent periods; fully amortizing; non-recourse with standard carve-outs |
| Mortgage insurance premium | 0.25% annual. Upfront: 0.25% for each year of the construction period, rounded up to a whole year |
| Construction funding | Monthly draws approved by the HUD inspector, with 10% retainage, which HUD may reduce to 5% after the work is 50% complete |
| Davis-Bacon | Applies to the general contractor and all subcontractors |
| Middle Income Housing | 90% of cost and 1.11 DSCR when generally at least 50% of units are restricted at or below 120% of area median income under an existing state or local program, for at least 10 years |
| Loans of $130 million and up | Tighter limits: 1.30 DSCR and 75% of cost for market-rate projects |
| Reports | Appraisal and market study, Phase I environmental site assessment, radon test, plan and cost review, Capital Needs Assessment from the plans, title and survey |
| Build-to-rent | Communities of detached homes, duplexes and triplexes are eligible as new construction, with up to 24 months of lease-up and an operating deficit reserve of at least the greater of 3% of the loan or 4 months of debt service. See HUD build-to-rent loans |
Cash you bring
- The gap between total development cost and the loan. Land you own is valued at HUD's appraised value and counts toward your equity; any debt on it is paid off at closing.
- Working capital: 4% of the loan on new construction (2% on substantial rehab), held in escrow; unused amounts may be released.
- Operating deficit reserve: on new construction, at least the greater of 3% of the loan or 4 months of debt service (6 months for an elevator building with one certificate of occupancy).
- Commitment and marketing fees, discounts and bond issuance costs are paid in cash. Lender financing and placement fees, up to 3.5% of the loan, are part of project cost.
- Your equity goes in before loan proceeds, except for up to 1% of the loan. With HUD approval, tax-credit equity and government funds can go in alongside the loan.
When it makes sense
- You want one loan from groundbreaking to permanent. No construction-loan maturity and no refinance risk at completion.
- Leverage matters. Up to 87% of cost for market-rate projects, 90% for affordable and Middle Income projects.
- You want long-term fixed debt. The rate is set at closing for up to 40 years after construction.
Own the land but not ready to close? See Bridge-to-HUD financing for land and pre-development loans carried to closing.
How it works
1
Concept meeting
We present the project to HUD. HUD strongly encourages one for market-rate deals.
2
Pre-application
Site, market and preliminary plans go to HUD, which responds with an invitation to submit a Firm application. Strong deals with an experienced team can go straight to Firm.
3
Firm application and HUD review
Final plans and specifications, cost review, appraisal and environmental review.
4
Firm Commitment and rate lock
HUD issues the Firm Commitment and the rate is locked.
5
Closing (Initial Endorsement)
Construction starts after closing.
6
Construction
Monthly draws, HUD inspections and Davis-Bacon wage compliance.
7
Cost certification and Final Endorsement
Amortization begins on the date set in the note, generally a few months after construction is complete.
Common questions
Does a 221(d)(4) require Davis-Bacon prevailing wages?
Yes, for the general contractor and all subcontractors. Offsite work, and demolition or site work completed before the HUD application is filed, are exempt.
Can construction start before closing?
Only with an early start approved by HUD. That requires a Firm Commitment, HUD-approved plans and contracts, a completed environmental review and a preconstruction conference.
My project already broke ground. Can I still use a 221(d)(4)?
No. New construction must have had no work on the site before closing. The usual path is a 223(f) once the property is complete and leased.
How much can I borrow?
The lowest of 87% of HUD's estimated replacement cost, the amount a 1.15 DSCR supports, and HUD's statutory per-unit limits, for market-rate projects. Affordable, rent-assisted and Middle Income projects: 90% and 1.11.
What counts as substantial rehabilitation?
Rehab of an existing, previously occupied building, including conversion of a non-residential building, where the work costs more than HUD's 2026 base of $20,406 per unit adjusted by the local high-cost factor.
What is the mortgage insurance premium?
0.25% a year. The upfront premium is 0.25% for each year of the construction period, rounded up. See HUD MIP: 0.25%.
Is build-to-rent eligible?
Yes, as new construction, under Mortgagee Letter 2026-12 (October 2026). HUD allows up to 24 months of lease-up and requires an operating deficit reserve of at least the greater of 3% of the loan or 4 months of debt service. See HUD build-to-rent loans.
Send us the site, budget and pro forma and we'll size your 221(d)(4) and your equity requirement.
Updated October 2026. Program terms summarize HUD's MAP Guide and current Mortgagee Letters, including ML 2025-03, ML 2026-1, ML 2026-05 and ML 2026-12; every loan is subject to HUD approval. Not a commitment to lend. See also: HUD 223(f) loans | HUD build-to-rent loans | Case studies | HUD loan types.