Sponsors coming from conventional construction lending tend to treat the loan amount as fixed once the commitment issues. On a 221(d)(4) it is not. The loan is re-tested against what the project actually cost, and if the number comes in low, the mortgage is cut.
The agreement signed before initial endorsement
Under 24 CFR § 200.95, before initial endorsement the mortgagor, the mortgagee and the Commissioner must enter into an agreement — Form HUD-93305M — for the express purpose of “precluding any excess of mortgage proceeds over statutory limitations.”
Under that agreement the mortgagor discloses its relationship with the builder, including any collateral agreement, and commits to three things:
- To enter a construction contract whose terms depend on whether an identity of interest exists between mortgagor and builder;
- To execute a Certificate of Actual Costs on completion of all physical improvements;
- To apply, in reduction of the outstanding principal, any excess of mortgage proceeds over statutory limitations based on actual cost.
That third commitment is the whole mechanism, and you sign it at the start.
The disclosure and construction-contract requirements do not apply where the mortgagor is itself the general contractor.
The certificate
Under 24 CFR § 200.96, the mortgagor’s certificate of actual cost is submitted on completion of the physical improvements and before final endorsement, on Form HUD-92330. The general contractor certifies separately where required, on Form HUD-92330-A.
The certificate must be verified by an independent Certified Public Accountant or independent public accountant in a manner acceptable to the Commissioner. This is a real audit engagement with a real fee, and it needs to be in the budget and scheduled well before completion.
Once HUD approves the certification, it is final and incontestable except for fraud or material misrepresentation. There is no later true-up in your favour.
How the reduction works
There is no dollar threshold. Cost certification is required on completion regardless of the size of the deal or the size of any variance. And the reduction is not discretionary — to the extent certified actual cost supports a smaller mortgage than the ratios and statutory limits permit, the excess must be applied to reduce principal at final endorsement.
In practice the loan is re-tested at the applicable loan-to-cost ratio against certified actual cost, and cut to the lower of that and the original commitment.
What this means in practice
Contingency you do not spend is not yours. If the construction contingency inside recognized cost goes unused, it comes out of the certified cost basis and therefore out of the loan. This is the single most common way sponsors are caught out. It does not mean spending contingency for the sake of it — that is a worse outcome — but it does mean modelling the downside case where the loan funds below commitment.
Non-mortgageable costs stay non-mortgageable. Cost certification tests what HUD recognizes, not what you spent. Money spent outside recognized cost does not help the certification.
Identity of interest changes the construction contract form. Section 200.95 makes the contract terms depend on the relationship, which is why the BSPRA decision has to be made early rather than negotiated at closing. See our BSPRA article.
Engage the accountant early. The CPA verification is on the critical path to final endorsement, and final endorsement is what converts the construction loan certificates into the permanent security. A slow cost certification delays the permanent loan.
How to plan for it
Run your equity model twice: once at the committed loan amount, and once at a loan sized to your realistic actual cost. If the second number leaves a gap you cannot fund, you have a problem to solve at the start of construction rather than at the end of it. Keep cost records in a form the CPA can actually certify from — the audit is far cheaper and faster when the contractor’s books were built for it from day one.