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HUD FHA 232 Transaction FAQs

It's important to make sure you fully understand all of the requirements and options when considering a FHA 232 transaction. The below frequently asked questions are here to help you understand everything from eligible properties to required escrows.

HUD FHA 232 Transactions Questions

Questions & Answers

What properties are eligible?

Section 232 provides construction loans for assisted living facilities, skilled nursing, and intermediate and memory care properties meeting the following requirements:

  • Must provide continuous care
  • Must offer three meals per day
  • Facility must be licensed by appropriate government entity
  • Non-resident day care not to exceed 20% of gross area and 20% of gross income
  • May include up to 25% non-licensed independent living units
  • 20 bed minimum
  • Operating leases to qualified facility operators are permissible, subject to HUD approval
  • Major movable equipment, day-care facilities, and fire safety equipment may be financed
  • If a state has a Certificate of Need program, a CON must be obtained prior to filing for Pre-Application

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Will HUD consider non-profit entities for the Section 232 program?


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Are there any special underwriting considerations for lower acuity Assisted Living Facilities?

If the units serve those needing assistance with at least 3 Activities of Daily Living (ADL) and meet the other ALF requirements (e.g. licensed) they are eligible under Section 232.  If they are independent, you would need to limit to 25% of total number of units or request a waiver of the 25% rule (for up to 30%). 

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Does the 25% limitation on Independent Living refer to 25% of units or 25% of residents?

The limitation on Independent Living refers to 25% of units.

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Does a property need to be eligible per the 3-year rule at the time of submission of the application, or would HUD accept an application submitted a few months in advance of the 3-year eligibility date?

Yes. The facility must have been completed or substantially rehabilitated for at least three years prior to the date of the Firm Commitment application. Projects with additions completed less than 3 years previous are eligible as long as the addition was not larger than the original project in size and number of beds.

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What are the maximum Loan to Values (LTV) and minimum Debt Service Coverage Ratios (DSCR) required by HUD for Skilled Nursing facilities (SNF), Assisted Living (ALF) and Independent Care Facilities (ILU)?

OHP Benchmarks for each facility type are below, with the LTV presented first (in percentage) and the DSCR presented after the LTV for each type:

  • SNF/ILU Both for Profit 80% LTV 1.45 DSCR
  • SNF/ILU Both Non-Profit 85% LTV 1.45 DSCR
  • ALF New for Profit 75% LTV 1.45 DSCR
  • ALF New Non-Profit 80% LTV 1.45 DSCR
  • ALF Existing for Profit 80% LTV 1.45 DSCR
  • ALF Existing Non-Profit 85% LTV 1.45 DSCR

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What escrows are required?

  • Taxes and Insurance escrowed monthly (post construction)
  • Replacement reserves required in accordance with HUD guidelines;
  • Working Capital Reserve equal to 2% of loan amount (post in cash or LOC)
  • Typically, equal to 12-18 months of debt service and released upon property maintaining 1.45x debt service coverage for 3 consecutive months
  • Debt service reserve is required and ranges from 6-12 months of principal, interest and MIP payments; will be held until an average debt service coverage of 1.45x is met for 12 consecutive months (no month can be below 1.25x).

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Is debt used for developer fees mortgageable?

Developer’s Fees are not eligible mortgageable costs. However, costs associated with development of the project are allowed to be repaid through a surplus cash note. Justification to support what is included in the developer’s fee, including evidence that the work was specifically related to the project, is required if a surplus cash note is used.

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What is the timing of the transaction from Engagement to closing?

Under the LEAN process this transaction can typically be completed in 9 to 12 months. Actual processing times vary depending on the complexity of the project and information available from the borrower.

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