AIT - Rental Housing for New Construction/Rehabilitation

The FederalHousing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD), provides mortgage insurance to facilitate the development of rental housing. The 221(d) program is FHA's program for the new construction or substantial rehabilitation of multifamily rental properties; Section 221(d)(4) is used by profit-motivated sponsors.

Benefits:

• Long term (up to 40 years), fixed-rate financing
• Federal guarantee results in AAA rating on financing
• Eligible for securitization by the Government National Mortgage Association (Ginnie Mae)
• Non-recourse loans

Program Eligibility:

• Properties must contain 5 or more rental or cooperative units
• Projects may be designed for elderly (aged 62 or older) or handicapped residents
• Eligible mortgagors include profit-motivated, nonprofit, limited distribution, cooperative mortgagors
• Properties must comply with specified HUD and local standards

Mortgage Limitations:

• The maximum insurable mortgage amount is the LOWEST of:
• 90% of FHA's estimate of the project replacement cost (may be up to 100%for nonprofit sponsors)
• The amount that can be amortized by 90% of net income for debt service (95% for nonprofit sponsors under Section 221(d)(3)
• Statutory per dwelling unit limits. These limits vary by HUD State/Area Office jurisdiction

• NOTE: The typical mortgage limiting factor is net income; FHA's underwriting analysis must establish that there is sufficient project income to repay the loan, taking into account all required expenses, replacement reserve requirements, and a vacancy and collection loss factor.

• Mortgage Term and Interest Rate:
• Term is limited to the lower of 40 years or 3/4 of the project's remaining economic life
• Interest rates are negotiated between the lender and the borrower

Other Requirements:

• Applications may be staged (e.g., Site Appraisal and Market Analysis stage, firm commitment). Application and inspection fees apply. The application fee aggregates to $3.00 or $1000 of requested mortgage amount at the firm commitment stage. The inspection fee is $5.00 per $1,000 of mortgage amount.

• Owners must sign Regulatory Agreement with HUD governing project operations
• Projects are subject to cost certification
• Prevailing wage requirements under the Davis-Bacon Act apply