How FHA New Construction/Substantial Rehab Loans Work


Explanation:  New Construction – MAP Loans


New-Construction-DETAIL-low-res-300x200The FHA/HUD new construction/substantial rehabilitation program is designed for apartments and health care facilities and is a conventional loan. FHA insures the mortgage and this results in favorable terms and low rates. Subsidy requirements, affordable housing percentages, and low/middle income requirements for tenants do not apply. The program allows for upscale projects with pools, tennis courts, etc. as long as mar­ket rents and market expenses support the costs.

The terms are a fixed rate (no balloon) construction loan based on 83.3% of costs, and a 1:20 Debt Service Coverage Ratio (Utilizing 83.3% of NOI).   When final construction numbers are accepted, the loan rolls into a 40 year fixed rate permanent at the same rate.  Many transactions allow a credit for appreciated land value.  This cal­culation uses value estimates from an appraiser for the intended use of the land as of the closing date. In turn, this may allow loan sizes to climb to more than 100% of total project “costs”. The construction mort­gage and the permanent are both non-recourse and always assumable (not just “one time” assumptions). The forty-year amortization period starts when construction is completed and it becomes a per­manent mortgage. The program also allows for a 10% Builder’s Sponsor’s Profit Risk Allowance (BSPRA) for apartments. This is similar to a developer fee that is based on all the hard and soft costs except the land and comes through the builder. See:

Download PDF

The FHA Insurance Process

Step 1: Finance Agreement

The finance agreement is our authorization to speak to HUD, local officials and others in order to complete due diligence efforts on your behalf. There is a packaging Fee $12,500 (refunded at closing) We visit the site, borrower, architect and other parties such as management agent, contractor etc. Should you find better financing before we start processing $5,-000 is refunded.

In cases for both apartments and health care projects, where we have market concerns or the borrower wants input as to what to build, we will have a market analysis performed by the contractor who will do the feasibility study to determine marketability of the development before funds are expended for detailed plans and specs. The study should show what to build, amenities, square footage, unit types etc. This report is internal and HUD never sees it unless we want to provide it as back up.

Step 2: Pre-Application Conference

Documents are assembled including floor plans, site plans and resumes of the team and submitted to HUD for a pre-construction conference that may be in person or by telephone. This meeting is with HUD staff, the borrower and any members of his team. If the office feels an application is warranted, they invite a submission for the pre-application.

 Step 3: Pre-Application Submission

The pre-application includes a phase I which the borrower can obtain in, and a third party feasibility study ordered by the MAP underwriter. The feasibility analyst is approved by and may have been trained by HUD. He/she takes what is being built and plugs it into the market to determine rents, absorption rates, operating deficit, operating expenses, vacancy rates and other data. Renderings, floor plans, site plans and other data are submitted with this application. A typical list of architectural requirements can be found here: No real engineering costs as these are the basic conceptual plans only. Your architect will know what these consist of and costs vary at this stage. Other costs would be the environmental estimated $2,000-$3,000, and half of the application fee to HUD. The application fee is 0.3% or 3/10ths of 1% of the mortgage amount. Half the fee is 0.15% or 15 basis points. The feasibility Study & limited appraisal estimated $8,500-$10,000. Submission of the pre-app package is made to HUD only after all the pre-application documents are complete. After review of the entire package and a possible site visit, HUD issues an invitation letter. This letter has invites the firm submission and has the rents, operating expenses, absorption rate, operating deficit and other information that HUD agrees to underwrite the mortgage insurance to. If this letter is acceptable, we always have closed as the only missing item is the costs. Step 3 can take 1-2 months to complete the feasibility study and HUD may require 1-2 months to issue the invitation letter. HUD has 45 days to issue the invitation letter per the handbook

Step 4: Firm Submission

(This stage can no longer be submitted at the same time as STAGE I)

Additional costs that you may incur include architects, legal expenses, other fees that may be charged by municipalities, sellers etc. After all construction documents, borrower and management agent documents are received it is packaged and the required number of copies are sent to HUD with the rest of the HUD application fee or another 15 basis points (0.15% of the proposed mortgage amount).

This is the most expensive step as the submission includes working drawings to commercial specifications. The closing of the construction loan is the first draw so there is no other part of the application due. It is complete and includes documentation of all the development team. The construction contract is also included.

This stage results in a Firm Commitment to Insure the Mortgage. We set up the closing date which an take 30 days for the G/C to get his bond in place and other documentation. The GNMAs will be sold prior to the closing and the entire mortgage amount is in escrow waiting for the draws to begin.

Step 4 can take HUD 1-2 months to issue the commitment. Borrower typically takes four to six months to complete plans, specs and get final costs

Step 5: Closing

(a few weeks from receipt of the commitment)

The GNMAs are sold and a good Faith Deposit, locks the rate and is paid two to four weeks before the closing  at ½% to 1% of the mortgage amount.  It is always refunded a few weeks later at closing All costs are financible if they are determined to be reasonable. ( eg: Attorney’s fees of $15,000 to handle the closing may be reasonable. Attorney’s fees of $200,000 on $2M loan would not).

Step 6: Construction to Permanent Closing:

After construction is completed a CPA completes a “Cost Certification” or audit of the General Contractor’s books and records for the loan. When this audit is accepted by all the parties, the mortgage becomes a permanent mortgage and the 40 year term starts. These closings usually occur by mail.

The total time line can take from 6 to 9 months if all documentation is complete and accurate. The shorter time frame is if completed plans and specs are already in the form HUD requires them For more detailed information, please review the 221(d)4 program for apartments and the 232 program for health care on the WEB at Choose multifamily housing.

Costs During the Process
Step Costs Result
1 12500 Our review of the development and approval
2 -0- HUD approved a pre-application Submission.
Possible architectural costs
3 0.15% of Mtg amount and estimated Invitation Letter from HUD with all underwriting
$18,000 for feasibility and Phase I
4 0.15% remaining app fee to HUD Commitment and sale of GNMAs
Architectural Costs
Appraisal and Engineering Review
Costs est: $20,000
5 Good faith deposit refunded at closing Construction starts
6 -0- 40 Year Permanent Starts

Email us at to find out if your project is eligible for FHA insurance or call 800-536-3371.