FHA/HUD 242 Multifamily Loans

The FHA 242 program provides credit enhancement to organizations for the construction and refinancing of healthcare facilities through the use of private lenders. Prior to the issuing of these loans, many organizations would only lend at very high rates or would not lend at all, limiting construction opportunities.

With FHA insurance through this program, lenders could lend to these facilities at lower interest rates. The need for these loans is evident in that the building, modernizing, and refinancing of these properties is critical to ensure enough medical facilities are available in communities that need them.

Take a look at a few of the most common features of these loans:

• The loan to value on these properties has to be the lesser of 90 percent LTC, 90 percent LTV or a minimum of 1.25 DSCR
• At least 20 percent of the amount borrowed must be used for the construction, rehab, repairs, or equipment

For 242/223f Acquisition or refinancing of existing hospitals:

• Over 20 percent of the loan must be used for construction, rehab, repairs, and equipment
• The construction of the building must have been completed in the previous two years before a HUD application for submission
• The loan size must be the lesser of 90 percent LTC, 90 percent loan to value, or 1.25 DSCR for the last three years and have a minimum average break-even operating margin for the previous three years

For 242/223(a)(7), refinancing of existing HUD insured hospital loans, the following must apply:

• Over 20 percent of the loan must be used for construction, rehab, repairs, and equipment
• The loan size will be limited to just the HUD original loan amount and not more
• The loan term is possible to extend up to 12 years, but it cannot be longer than either 25 years or the original HUD loan term, whichever is lesser

For 242/241(a) supplemental loan for repairs, additions, and improvements for existing HUD financed hospitals, the following must apply:

• Over 20 percent or higher of the proceeds for the loan must go to construction costs, rehabilitation costs, repairs, and equipment
• The loan may be the lower of 90 percent LTC, 90 percent loan to value, or a minimum of 1.25 DSCR combined
• The term for this loan is a construction loan that is then followed by the obtaining of a permanent loan that has the same end date as the current HUD first mortgage on the property.
• Loan terms can change. They are subject to lender approval.

Yes, there is a 0.5 percent HUD inspection fee based on the mortgage amount for any sub-rehabilitation and new construction project. This is between 0.1 and 0.4 percent for 5 to 19 percent of hard costs.

Those taking out these loans must be a public mortgagor, such as the owner of the public facility, a private nonprofit association, or a private-motivated mortgage that meets all of the definitions as it relates to being a hospital as set under this section of federal loan.

In general, this loan is only available for use in situations of new construction, refinancing, modernization, equipment, expansion, and remodeling of specific hospitals. That includes acute care hospital facilities. It can include other options such as small rural critical access hospitals as well as larger teaching institutions as well.