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HUD SECTION 242 – Office of Hospital Facilities (OHF) Processing

Section 242 – Loans for new construction or renovation of existing hospitals

Program Features

  • Borrowers can be non-profit, for-profit or publicly owned facilities. 
  • At least 50% of patient days must be attributable to acute care; non-acute patient days include skilled nursing, rehabilitation, psychiatric and other related services.  HUD will allow adjustment of the patient day calculation based on revenues.
  • Combines construction and permanent financing approved at the same time.  
  • Construction is subject to Davis-Bacon Prevailing Wage requirements.
  • Loans involving the refinance of existing capital debt must have a construction/capital equipment component of at least 20% of the loan; of the 20%, no more than 50% can be used to purchase equipment.  Hospitals seeking to refinance existing capital debt without a 20% or greater construction/capital component may qualify under Section 242/223(f).
  • Hospitals must have an average operating margin of at least 0.00% and an average debt service coverage ratio of at least 1.25 X for the past three years. 
  • If the three-year average operating margin and debt service coverage test can’t be met, HUD will allow the tests to be recast for the prior three-year period by applying an estimate of the projected interest rate on the HUD-insured loan in lieu of the historical interest rate.  
  • Maximum loan to value (LTV) is 90%, with the value being determined as the total estimated replacement cost + net property, plant and equipment.
  • Loans are pre-payable, assumable, and non-recourse; the maximum term is 25 years with full amortization.


Application Fee to HUD
Mortgage Insurance Premium to HUD
0.10% - 0.50%
Inspection Fee to HUD
Maximum Financing (Origination) Fee
Maximum Placement Fee
Costs of Issuance for Tax-Exempt Bond Transactions

An annual 0.70% Mortgage Insurance Premium is paid to HUD as part of the monthly mortgage payment.  The Inspection Fee is based on a sliding scale of the hard cost of construction or renovation to a maximum of .50% if the costs are 20% or greater of the loan amount. 


  • Full escrows required for property insurance, real estate taxes, and HUD mortgage insurance premium.
  • A Mortgage Reserve Fund is required equal to one year’s debt service after 5 years and two years debt service after 10 years is required.  The Reserve is funded from the hospital’s operations.
  • Working Capital Deposit equal to 2% of the mortgage required at closing.  This deposit may be capitalized in the mortgage at closing for non-profit borrowers.
  • A letter of credit may be provided at initial closing to meet project cash requirements under Section 242.  This will be drawn upon by the end of the construction period if needed.