HUD 221(d)(4): construction and substantial rehab loans for apartments

Who 221(d)(4) is for

221(d)(4) fits a developer who wants to build new apartments, or gut-rehab an existing building, and hold them long term. The appeal is one closing: the construction loan becomes a fixed-rate, fully amortizing, non-recourse permanent loan of up to 40 years, so there is no refinance risk at completion and no balloon. The price is time and paperwork: a two-stage HUD review, prevailing wages, and a cost certification at the end.

It is the second most used FHA apartment program after 223(f); the panel beside this page counts the active 221(d)(4) loans in HUD’s file. For a mixed-use project with more than 20% commercial income in a revitalization area, Section 220 is the better fit. For an addition to a property that already has an FHA-insured loan, look at 241(a).

The 2026 sizing tests

HUD sizes the loan at the lowest of the requested amount, the loan-to-cost test, the debt service test and the statutory per-unit limit. Cost here means HUD’s estimate of replacement cost, which for substantial rehab includes the “as is” value of the existing building.

The first four rows come from Mortgagee Letter 2025-03 (January 2025) and Mortgagee Letter 2026-1 (January 2026). The printed MAP Guide still shows the old 85% and 1.176x market-rate figures; they no longer apply. The large-loan rows come from Mortgagee Letter 2023-14, which also requires a 12-month operating deficit and debt service reserve and principals with net worth of at least 20% and liquidity of at least 7.5% of the loan. HUD has not published a change to that table since. The $130 million threshold is the 2026 figure from Mortgagee Letter 2026-05.

Debt service in the coverage test includes the 0.25% annual MIP, so the October 2025 premium cut (from 65 basis points for market-rate 221(d)(4)) raised proceeds on coverage-constrained deals. Run your numbers in the 221(d)(4) sizer.

The Middle Income option

Mortgagee Letter 2026-1 gives market-rate developers the affordable-tier ratios (90% and 1.11x) when, as HUD’s guidance puts it, at least 50% of units are targeted to households at or below 120% of area median income. Regional Center Directors can accept a state or local program that falls somewhat short of 50% (the letter says 40% or more may be considered; 20% to 30% generally will not). The restriction has to come from an existing state or local middle-income program, or a military Rental Partnership Program, and be recorded so it survives a sale or a transfer of physical assets. The minimum restriction period is 10 years, waivable down to 5. HUD reviews the state or local program itself: a one-off deal between a single developer and a housing authority does not qualify. The option is not available under Sections 220 or 231 or the risk-sharing programs.

Statutory per-unit limits

The per-unit limit is the base amount for the bedroom count and building type times the area’s high cost percentage. For 2026 every listed base city is at 270%, high cost areas can reach 315% project by project, and Alaska, Hawaii, Guam and the U.S. Virgin Islands are at 405%.

Example from the table in force: a two-bedroom elevator unit in a standard area is $103,004 x 2.70 = $278,111 per unit.

The ROAD to Housing Act (Public Law 119-101, July 11, 2026) wrote the new, roughly fourfold base amounts into the statute and switched annual indexing to a Census construction price index. HUD has not yet published a notice implementing them, so lenders still size on the CY2026 indexed table. Check a specific property in the statutory limit calculator and read how the limits work.

Term, rate and premium

• Term: the construction period plus up to 40 years of amortization, capped at 75% of the building’s economic life. Level payments, no interest-only permanent period.
• Rate: fixed, negotiated with the lender and locked before initial endorsement. Our rates page shows what recent 221(d)(4) loans actually closed at, from HUD’s file.
• MIP: 0.25% a year. At closing you pay the annual premium for each year of construction, rounded up to a whole year, so a 26-month build pays 0.75% upfront. Payments are reconciled at final endorsement. See the MIP guide.
• Prepayment: HUD permits restrictions but does not impose them. Lockouts and penalties come from the Ginnie Mae or bond execution.

Substantial rehabilitation: where the line is

A rehab is “substantial” when the aggregate construction cost, including contractor and architect fees and the contingency actually spent, exceeds the base per-unit limit times the high cost percentage times the number of units. The 2026 base is $20,406 per unit. At the standard 270% multiplier that works out to about $55,096 per unit; the 315% high cost area figure cannot be used for this test. Conversions of non-residential buildings to apartments also count as substantial rehab. Projects where above-ground construction started but was never finished or occupied are not eligible.

Below the line, the property belongs in 223(f), which caps repairs at the same threshold.

Davis-Bacon and other construction rules

• Prevailing wages: the general contractor and every subcontractor pay Davis-Bacon wages and file weekly certified payrolls under the Copeland Act, whether HUD insures advances or only the finished loan. Off-site work and site work finished before the first HUD application is submitted are exempt. More on the Davis-Bacon page.
• Working capital escrow: 4% of the loan for new construction (half of it a construction contingency) and 2% for substantial rehab.
• Assurance of completion: a payment and performance bond, cash or a letter of credit.
• Cost certification: an independent CPA certifies actual costs at completion, and HUD can reduce the final endorsed amount if costs came in lower.
• Absorption: lease-up assumptions are capped at 18 months from first delivery (24 months for build-to-rent), with an exception possible for large high-rises.
• BSPRA or SPRA: a profit-motivated borrower can count a builder and sponsor profit and risk allowance (10% of most hard and soft costs, with an identity of interest with the contractor) toward its equity, or a sponsor allowance on soft costs without one.
• Commercial space: up to 25% of net rentable area and 15% of effective gross income.
• Energy code: IECC for buildings up to three stories, ASHRAE 90.1 above that.

Build-to-rent

Since Mortgagee Letter 2026-12, detached houses, duplexes and triplexes built as one rental community qualify for 221(d)(4) new construction. The site must be contiguous with 5 or more units, professionally managed, with no interspersed private lots and no parcel sales during the loan. HUD wants an initial operating deficit escrow of at least the greater of 3% of the loan or four months of debt service, and vacancy of at least 7% for market rate. The build-to-rent guide covers the rest.

How the process runs

1. Concept meeting. Strongly encouraged for market-rate deals (optional for affordable). HUD answers in writing within five business days, and the answer is not a commitment.
2. Pre-application. HUD reviews market, site, sponsor and feasibility before anyone spends on full plans. Half the 0.30% application fee is due here for market-rate deals. A lender can ask to skip this stage on strong, experienced deals.
3. Invitation letter. If HUD invites a firm application, the lender confirms within 30 days and submits within 120 days (one extension of up to 90 days possible).
4. Firm application and commitment. Full plans, cost review, appraisal and market study. The commitment is valid for up to 180 days plus a discretionary 60.
5. Initial endorsement. Rate lock, closing and the first insured draw. Construction runs under HUD inspection, with an inspection fee of 0.5% of the loan (of the improvement cost, for substantial rehab).
6. Final endorsement. After completion and cost certification, the loan converts to permanent amortization.

HUD does not publish an end-to-end processing time for 221(d)(4). The timeline guide explains where the time goes, and the 223(f) vs 221(d)(4) comparison helps if the property is close to the rehab line.