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FHA/HUD 242 Multifamily Loans

Financing For Acute Care Hospitals
  • For those seeking to purchase acute care hospital facilities, teaching institutions, or critical access hospitals in rural areas, the FHA 242 multifamily loans may offer an option.
  • These loans were made possible through the National Housing Act, Section 242, which went into place in 1968. They were designed to make it possible to obtain necessary financing for hospitals and to encourage lenders to offer loans for these projects. Since its founding, the FHA 242 loan program has issued about 500 loans worth more than $22 billion across 43 states and Puerto Rico.

FHA/HUD 242 Loan Highlights


Amortization: It is a fully amortizing loan.

Interest Rate: This loan is a fixed rate loan for the entire term. See current LIBOR rates.

HUD Inspection Fees: These are required. For 242 loans and 242/241a programs, the fee is 0.5 percent of construction, rehab, repairs and equipment (CRRE), while for others, it will range from 0.1 to 0.4 percent.

Recourse: These are non-recourse loans, though they are subject to HUD regulator agreements.

Reports Required: A study of the market is necessary, along with the financial feasibility of the project, an appraisal, and a Phase 1 Environmental and Appraisal report.

Prepayment Penalty: Typically, these are for a 10 year lockout, and then it is prepayable at par.

Mortgage Reserve Fund: This is 0.2 percent of the loan amount borrowed that is then escrowed each year during years 1 to 10 of the term of the loan.

Operations and Lien Priority: These loans are generally for greater than 50 percent in acute care patient days, and the field lien on hospital real estate and accounts receivable.

Advantages of FHA/HUD 242 Loans

There are some advantages of the FHA Section 242 loan program:

  • Fixed Rate: These loans are attractive in terms of their fixed rate loans and terms (which range between the various forms).
  • Maximum Leverage: They also provide maximum leverage for borrowers without having to put a lot down to get the project started.
  • Lower Interest Rates: FHA 242 mortgage insurance tends to lower interest rates and makes these loans more accessible.
  • Diversify: These programs help to promote a diverse FHA loan portfolio.

Disadvantages of FHA/HUD 242 Loans

Some of the disadvantages of the FHA Section 242 loan program include:

  • Restricted Use: They are restricted for use on just hospitals and similar types of medical facilities.
  • Approval Time: The approval timeframe can be limited in some situations.
  • Fixed Rate: There is no variable rate available for those who would pursue this.
  • Costs: Insurance costs can be high and limiting in some situations

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What Are FHA Section 242 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.

FHA 242 Loan Terms

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.

Is there a required HUD inspection fee for the 242 loan program?

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.

Who are eligible borrowers for 242 loan program?

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.

When can a 242 loan program be used?

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.

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