HUD's Section 221(d)(4) program insures a single loan that finances the construction or substantial rehabilitation of a multifamily rental or cooperative project and then stays in place as its long-term mortgage. In 2026 three of HUD's sizing tests usually decide the amount: up to 87% of cost for a market-rate project (90% under the new middle-income option), a minimum debt service coverage ratio of 1.15x (1.11x for middle-income), and HUD's statutory per-unit limits. The smallest result controls, and in the example below, at an assumed 6.25% debt service rate, that is the coverage test.
What the program insures and who can use it
The federal program inventory describes Section 221(d)(4) as insuring "mortgage loans to facilitate the new construction or substantial rehabilitation of multifamily rental or cooperative housing for moderate-income families, elderly, and the handicapped." Eligible applicants listed for the program include for-profit companies, private and public nonprofits, and individuals. HUD insures the loan, and an approved lender makes it.
Two features shape how sponsors use it:
- One loan for construction and the permanent period. The insured loan carries through construction and into a long amortizing term. GAO's 2012 program inventory described mortgages of up to 40 years. Confirm the current term and any construction-period limits with the originating lender, since program rules change.
- Leverage measured against cost. HUD's maximum ratio for these projects is stated as a loan-to-cost percentage, so the sponsor's equity is measured against the full development budget. That leverage comes with HUD's processing, documentation and ongoing regulatory requirements.
The program is used for market-rate as well as affordable housing. HUD's current ratios distinguish market-rate projects from the middle-income option described below.
The three sizing tests in 2026
1. Loan-to-cost
Mortgagee Letter 2026-01, dated January 22, 2026, lists the current 221(d)(4) new construction and substantial rehabilitation ratios: 87% loan-to-cost for market-rate projects and 90% for the new middle-income category. The market-rate figures trace back to Mortgagee Letter 2025-03, published January 8, 2025, which revised HUD's DSCR and LTV/LTC ratios.
2. Debt service coverage
The same letter sets the minimum DSCR at 1.15x for market-rate projects and 1.11x for middle-income projects, with a 7% vacancy factor in the underwriting. Coverage is measured on the projected stabilized net operating income, so the interest rate, the amortization term and the mortgage insurance premium all move this test. For a refresher on how the coverage ratio works, see our DSCR calculator and Debt Yield vs. DSCR vs. LTV.
3. Statutory per-unit limits
HUD indexes the 221(d)(4) per-unit limits every year. The 2026 notice, published in the Federal Register on May 6, 2026, raised the limits by 2.3%, the CPI-U change used for the HOEPA adjustment. The new limits may be applied to applications submitted or amended on or after January 1, 2026, if the loan has not been initially endorsed.
| Unit type | Non-elevator limit (2026) | Elevator limit (2026) |
|---|---|---|
| Studio | $68,401 | $73,889 |
| 1 bedroom | $77,649 | $84,706 |
| 2 bedrooms | $93,859 | $103,004 |
| 3 bedrooms | $117,808 | $133,252 |
| 4+ bedrooms | $133,121 | $146,274 |
In the example below, the base limits alone would support only $6.56 million on a $19.5 million project, so the high cost percentage matters. Mortgagee Letter 2026-05 (May 20, 2026) lists most designated high-cost areas at 270%, including Washington, DC and Los Angeles, and Alaska, Hawaii, Guam and the U.S. Virgin Islands at 405%. The letter is effective January 1, 2026 for firm commitment applications and amendments not yet initially endorsed.
The middle-income option
Mortgagee Letter 2026-01 added a middle-income category to 221(d)(4) and fully superseded Mortgagee Letter 2025-2. To qualify:
- The project must participate in, and qualify under, an existing state or local middle-income program (HUD also accepts the Military Rental Partnership Program), and a state or local government entity must monitor compliance with the use restriction annually.
- At least 50% of the units must be targeted to households earning up to 120% of area median income.
- The targeting must be secured by a recorded use restriction with a minimum term of 10 years. HUD's Regional Center Directors can approve a shorter term where tenants receive enhanced benefits, but never below 5 years.
- The terms apply to any application that has not reached initial endorsement.
In return, the project can be sized at 90% of cost and 1.11x coverage instead of 87% and 1.15x. The letter also generally treats projects on Department of Defense or Department of the Interior land acquired or ground-leased in 2025 or later as eligible without a separate state or local program. For a sponsor already planning workforce rents, the question is whether the extra proceeds outweigh a decade of rent and income targeting on half the units.
Mortgage insurance premium
HUD's June 2025 proposal set out to cut the annual mortgage insurance premium for all FHA multifamily programs to 25 basis points. For 221(d)(4) new construction or substantial rehabilitation without low-income housing tax credits, the proposal cut both the upfront and annual premium from 65 basis points to 25. The proposal would also eliminate the separate green, affordable and broadly affordable premium categories. The National Association of Home Builders reported on September 23, 2025 that FHA is reducing the annual premium for all multifamily programs to 25 basis points, effective October 1, for applications submitted or amended on that date so long as the loan has not been initially endorsed. Confirm the premium in your firm commitment.
Forty basis points matters on coverage. On a $15 million loan it is $60,000 a year of debt service, which at 1.15x coverage needs $69,000 of NOI to carry.
Worked example: a 72-unit garden project
Assume a three-story, non-elevator project in an area with a 270% high cost percentage. The numbers are illustrative; the lender, HUD and the market set actual terms after underwriting.
| Assumption | Value |
|---|---|
| Units | 24 one-bedroom, 40 two-bedroom, 8 three-bedroom |
| Total development cost | $19,500,000 |
| Underwritten stabilized NOI (after 7% vacancy) | $1,150,000 |
| Debt service rate | 6.25% (assumed 6.00% note rate plus the 0.25% annual premium) |
| Amortization | 40 years, monthly payments |
The annual loan constant at 6.25% over 40 years is 6.813%: each $1 of loan costs about $0.068 a year in principal and interest.
Statutory limit test. (24 × $77,649) + (40 × $93,859) + (8 × $117,808) = $1,863,576 + $3,754,360 + $942,464 = $6,560,400. Applying the 270% high cost percentage gives $17,713,080.
Cost test. Market-rate: 87% × $19,500,000 = $16,965,000. Middle-income: 90% × $19,500,000 = $17,550,000.
Coverage test. Market-rate: $1,150,000 ÷ 1.15 = $1,000,000 of maximum annual debt service, and $1,000,000 ÷ 0.0681287 = about $14,678,091. Middle-income: $1,150,000 ÷ 1.11 = $1,036,036, and $1,036,036 ÷ 0.0681287 = about $15,207,032.
| Test | Market-rate | Middle-income |
|---|---|---|
| Statutory limit × 270% | $17,713,080 | $17,713,080 |
| Loan-to-cost | $16,965,000 | $17,550,000 |
| DSCR | $14,678,091 | $15,207,032 |
| Loan (lowest of the three) | $14,678,091 | $15,207,032 |
| Equity and other sources needed | $4,821,909 | $4,292,968 |
Coverage binds in both cases. The market-rate loan comes to about 75% of cost. The middle-income option adds about $529,000 of proceeds, well under the $585,000 that three more points of cost would imply. The rate drives the result:
| Debt service rate | Market-rate loan | Middle-income loan |
|---|---|---|
| 5.75% | $15,638,068 | $16,201,602 |
| 6.25% | $14,678,091 | $15,207,032 |
| 6.75% | $13,811,617 | $14,309,333 |
Each half-point of rate moves the loan by roughly $870,000 to $1 million on this project. With these assumptions, the cost test would not bind until the debt service rate fell to about 5.14%. A sponsor who budgets equity at 13% of cost on the assumption that HUD lends 87% can be short by several points at closing. Size the equity from the coverage test first. Our guide to how construction loan sizing works walks through the same logic for bank and private construction loans.
Other thresholds HUD indexed for 2026
Mortgagee Letter 2026-05 also updated two figures from HUD's MAP Guide:
- Substantial rehabilitation. The per-unit dollar threshold used in the MAP Guide's substantial rehabilitation definition is $20,406 per unit for 2026, after a 2.3% CPI-U increase to the prior year's base.
- Large loans. The large loan risk mitigation threshold stays at $130 million for 2026, unchanged because the 2.3% CPI-U increase did not reach the $5 million rounding increment.
Questions to answer before choosing 221(d)(4)
- Does your hold period match the loan? The program pairs construction with a long amortizing term, so it lines up with a plan to own the property after stabilization. A plan to sell or refinance early should be checked against the loan's prepayment terms before you apply.
- Which test binds? Run the coverage test at a realistic debt service rate before assuming the cost ratio. In the example, coverage controls at any rate above about 5.14%.
- Is the middle-income option worth the restriction? It added about $529,000 in the example, in exchange for at least 10 years of income targeting on half the units and a qualifying state or local program.
- Do the statutory limits fit your market? Multiply your unit mix by the 2026 limits and your area's high cost percentage. Outside designated high-cost areas, the base limits can become the binding test.
- Can the schedule carry HUD's process? The loan comes with HUD's application, documentation and ongoing reporting requirements, which the land contract and construction schedule need to allow for.
Compare the answers against bank and private construction financing and, for income-restricted projects, the options on our nonprofit and affordable housing page. Our multifamily page covers the broader range of apartment financing.
Bottom line
HUD's 2026 ratios are 87% of cost and 1.15x coverage for market-rate 221(d)(4) projects, or 90% and 1.11x for projects that qualify under a state or local middle-income program and restrict at least half their units to households at or below 120% of area median income for at least 10 years. The 2026 statutory limits and high cost percentages apply to applications submitted or amended on or after January 1, 2026 that have not been initially endorsed. In the example, coverage sets the loan at any debt service rate above about 5.14%, so model the DSCR test first, size equity from it, and treat the cost ratio as a ceiling.