FHA 221(d)(4) or a bank construction loan for new apartments

The real difference: one loan or two

A bank construction loan is the first of two loans. It funds the build, then has to be repaid by a permanent loan or a sale, at whatever rates and underwriting exist when the building is finished and leased. HUD’s 221(d)(4) is one loan: the rate is set at the initial closing, the loan funds construction in draws, and it then amortizes on HUD’s schedule: Up to 40 years (or 75% of remaining economic life, if less)². You trade a long front end for the removal of takeout risk.

150 new apartments: HUD or bank plus takeout

Illustration. A developer will build 150 market-rate units for a total cost of $36,000,000, land included. Stabilized NOI is projected at $2,600,000; at an illustrative 6.0% cap rate the finished property is worth about $43,333,000. Assume HUD prices the note at 6.10% on a 40-year schedule, with the premium added for sizing. Assume the bank lends 65% of cost, floating, interest-only during construction, with a full completion and repayment guarantee.

At closing (illustration)	FHA 221(d)(4)	Bank construction loan
Cost-based limit	87% of cost = $31,320,000	65% of cost = $23,400,000
Coverage limit on stabilized NOI	1.15x: about $32,594,000	tested by the takeout lender later
Loan	$31,320,000	$23,400,000
Developer equity	$4,680,000	$12,600,000
Coverage once stabilized	about 1.20x on principal, interest and premium	n/a until the takeout
Rate risk until stabilization	none	full; the takeout prices later

HUD needs about $7,920,000 less equity. The bank developer gets some of that back later. If the permanent lender at stabilization quotes an illustrative 6.00% on a 30-year schedule at 1.25x, the takeout sizes to about $28,911,000, and about $5,511,000 comes back out before closing costs. At 6.75% the same test sizes to about $26,724,000, and the cash back shrinks by about $2,187,000. That swing is the takeout risk HUD removes.

Bank capital rules shape the bank’s offer. A construction loan that lacks enough contributed equity is classified as high-volatility commercial real estate. The threshold is 15% of appraised as-completed value (about $6,500,000 here), and HVCRE loans carry a capital risk weight of 150%⁴. The bank developer’s $12,600,000 clears it; a thinner equity check would make the loan more expensive or unavailable.

What each lender checks

HUD and its lender: the market study, the plans and specifications, an independent cost review, the general contractor’s qualifications and bonding, the wage determination, environmental review, and the sponsor’s experience and liquidity. Per-unit statutory limits cap the loan, and high-cost areas get more room: Up to 270% of base limits; up to 315% case by case in High Cost Areas⁵.

The bank: the sponsor’s track record and liquidity, the guarantor’s net worth, the general contractor contract and budget, the as-completed appraisal, presales or pre-leasing if any, and its own concentration room. The supervisory screen for construction: Construction, land development and other land loans at 100% or more of total risk-based capital⁶.

The costs people miss

• Davis-Bacon wages on HUD. Prevailing wages (Davis-Bacon) required on 221(d)(4) new construction and substantial rehab². Prevailing wage rates can raise hard costs, and the payroll reporting adds administration for the contractor.
• HUD’s front end. Architecture, cost review and third-party reports must be done before closing, which means paying for them with equity while the land carries.
• Bank interest during construction. The floating rate on the drawn balance is paid from an interest reserve in the budget. A rise in SOFR during construction comes out of that reserve.
• Bank extension fees. If lease-up runs long, extensions cost fees and require tests.
• Two sets of closing costs on the bank path, construction and permanent.
• The guarantee. A bank’s completion and repayment guarantees sit on the sponsor’s balance sheet until the takeout.

Market conditions

Bank construction lending is the tightest corner of commercial real estate. The Federal Reserve’s July 2026 survey: Construction and land standards basically unchanged (net 3.7% eased)⁷, and Net 11.1% of banks saw weaker construction loan demand⁷. A significant net share of banks said construction lending standards sit at the tighter end of their range; standards for other CRE loans were relatively tight, but less so than in July 2025⁸. FDIC data at mid-2026: $453 billion in bank construction and development loans⁹. HUD’s 2025 premium cut lowered the carrying cost of a 221(d)(4) against bank-plus-takeout execution.

Planning a ground-up apartment project? Send the budget, pro forma and schedule, and we will price HUD against bank construction with a modeled takeout.