Everybody loves the terms of an FHA deal:  high-leveraged, fixed rate, assumable, non-recourse fully amortizing financing for 35-40 years.

Terms like that went out with right on, power to the people, make love not war, and Gas-$.53/gallon.  I must confess that I still try to use Daddio and swell as often as I can even though those terms pre-date the ‘70s.

Still, people often get frustrated by the time an FHA deal will take, perhaps because their lender kind of soft pedals that discussion. I have found that the easiest approach to signing up business is to tell the client every bad thing I can think of that can happen with their deal, thinking that if those items don’t kill the deal, then perhaps we are on to a deal that is likely to close.

In that vein, let’s outline generally the timing and process for a 221 (d) 4 new construction, which is generally mirrored with a (d) 4 Substantial Rehabilitation loan.

I stress general time frames as any number of individual problems can slow a deal down-flood plain issues or other environmental issues require time to be cured.  Zoning and NIMBY (not in my backyard) problems slowed a deal of ours last year for 6 months before we got back on track.  Things extraneous to FHA should not be used as a reason why one complains about FHA.

So here goes with the timing and the process:

DAY 1: Signing the Engagement Letter.  Typically a small processing fee (usually $2,000) and funds for a rent comparable survey or a mini market survey will be due at this time, in order to prepare a Concept Meeting package. This is also when we make a site visit, take pictures, and gather relevant information for the package.


The good thing about a Concept meeting is that it provides everyone the opportunity to find out whether FHA is going to do the deal.  While the Pre-App is the real determinant, you can sure feel better about spending money if FHA seems enthusiastic about going forward with your deal.  If you have the time, and don’t want to put a lot of money at risk (say, $3,500-$5,500), the Mini Market Study or Rent Comparable Survey is the right approach.

Starting out with the third party reports. In the alternative, we could collect the money for the initial third party reports-Market Study, Income and Expense Analysis, and Environmental at Engagement. These reports will take approximately 30 days. During that time, we will be gathering the documentation needed for both a Concept Meeting and a Pre-Application submission, two required FHA steps under the new processing rules. Doing the reports early, pre-Concept, will eliminate the Mini Market study but will involve spending more money upfront.

Around day 30, we will have the Concept Meeting with the FHA office. Any changes to the proposal from previous discussions will be highlighted and FHA’s comments and reactions will be evaluated and included for the Pre-Application submission.

Approximately a week later, we will hear from FHA to proceed (I am usually highly confident they will say yes). It is then that the two alternatives described above will influence the timing: if we do not start on the full third party reports until we hear back on the Concept Meeting, then figure an additional 30 days


We will submit the Pre-Application for FHA determination shortly after receipt of the third party reports, either after Concept Meeting or after Concept Meeting and the 30 day period for the report to be completed.

The Pre-Application is when FHA really decides whether they will do the deal or not. If we are invited to proceed to firm, you can count on the deal going through. Again, if properly evaluated and presented, expect FHA not to have any trouble with your deal in most cases.


  1. FHA will evaluate the market, the rents and expenses needed to support the loan, the contractor, management and developer, to see if they are comfortable with the proposal (the same exercise undertaken by FHA for any proposal) before inviting the package for Firm Application submission.   This FHA process will likely take 45 days.


Pre-Application is the new firm.  After Invitation, think of the process as heading towards close, unless certain conditions need be met before Firm Application.


Pre-Application now requires half the FHA application fee (15 bps), or $15,000 per every $10,000,000 of loan amount.


  1. Following this process, FHA awards an Invitation to Proceed to Firm Application.  This is when, as a developer, you know that you have a deal.  FHA defines the proposal they want to see-the number of units, the rents and expenses, the other income they will recognize, and the timing for delivery of the completed proposal.   Land value is also determined at that time.


  1. It is at the time when the Invitation to proceed to Firm Commitment is given that the borrower knows it will receive a loan commitment from FHA, barring a dramatic surprise.  Why is that?  Simply because the borrower starts spending real money at that time, likely obligating itself for significant cash in processing costs, including architectural and engineering services.  The borrower needs assurances from FHA that the deal will proceed before such an undertaking and expenditure. The Invitation provides such assurance.


  1. This is the time when architects are working in earnest, contractors begin lining up subs and their bids, moneys are spent on the Review Architect and developer contact with the City begins to intensify.  FHA allows for 120 days between the Invitation and the submission for Firm application.  The funny thing is that nearly without exception, it takes 120 days to get the plans completed and approved by the Review Architect, the 2328s completed and approved, the Review Architect reports delivered to us and for all the other processing items to reach our company.  We almost always need to ask for a 30 day extension because the process just described takes 4 months.


  1. Given the Invitation and the amount of money being spent in reliance on the Invitation, one could say that the rest of the process, post-Pre-App, is really a case of preparing for closing. In twelve years of operating under the Invitation process, I have not been a party to a transaction that FHA later rejected following an Invitation being extended.


  1. The Firm Application is delivered to FHA. Another 15 bps Application fee is paid. FHA rules require completion of the review in a maximum of 45 days, at which time, they issue a commitment. This time frame is more usually met than not, unless problems arise. Then the time is usually extended so as to cure whatever is the heartburn.


  1. The commitment is issued, accepted, funds are bought and the closing process takes about 30 days.


  1. This process, all told, should then, should take around 230-290 days to complete, closing into the construction loan and for construction to begin.


We can shorten this timetable 30 to 60 days by getting started sooner on the third party reports and having the architect and contractor get started during Pre-Application.  Using experienced people can make sure the time frame is adhered to or by prodding vendors to move more quickly.  Sometimes paying more will expedite, as cash has no enemies.


8 or 9 months is obtainable if you are working with people who know what they’re doing, certainly no worse than 10 months.


All in all, it’s not a bad turn around for this type financing if you have the time to complete it.