Basics of FHA Insurance
HUD/FHA provides mortgage insurance on loans that cover residential care facilities. Known as a Section 232 loan, these loans help finance nursing homes, assisted living facilities, and board and care facilities. FHA mortgage insurance provides lenders with protection against losses as the result of borrowers defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a borrower's default. Loans must meet certain requirements established by FHA to qualify for insurance. Proposed projects are evaluated on the basis of whether the proposal is an acceptable insurance risk for the FHA Insurance Fund. It is not a competitive process.
Section 232 may be used to finance the purchase, refinance, new construction, or substantial rehabilitation of a project. A combination of these uses is acceptable - e.g. refinance of a nursing home coupled with new construction of an assisted living facility.
Processing of Section 232 Loans
HUD developed its Lean process in 2008 for Section 232 applications (it only applies to Section 232 applications). Lean is not an acronym, but rather is a methodology based on the Toyota model to increase efficiency by reducing waste. Reductions in processing variability and non-value added activities are explored using value stream mapping. Full use of the internet and value added software tools for application submission, underwriting and closing, as well as punch lists are resources currently being developed and implemented for the Section 232 program.
Previously, loans were processed under Multifamily Accelerated Processing (MAP) or Traditional Application Processing (TAP) by the local HUD Field Office. Non-Section 232 projects will continue to be processed under MAP or TAP. Whichever process is used, applications for mortgage insurance are assembled and underwritten by FHA-Approved Lenders before being submitted to HUD for processing of the Firm Commitment.
HUD's Lean Process
HUD’s new Lean process employs standardized work products and processes to obtain a consistent, timely results. The following are some of the changes implemented with the Lean process:
- We have developed standardized checklists, statements of work for third party work, certifications, and templates for the lenders to use in their assembly of the application package. Moreover, we have developed standardized punchlists for HUD staff to use in their underwriting of submitted applications.
- We have removed portions of the application process/requirements for submittal that were duplicative or not necessary (e.g. no need to submit closing related documents that are submitted with the Firm Application twice, removal of forms that are not needed, development of consolidated certifications, etc).
- We have revised the third party appraisal requirements so that the appraisal is a market appraisal - no requirement to use HUD forms and no proprietary earnings carve out.
Effective September 1, 2008, all Section 232/223(f)’s were required to be processed using the new Lean process. On March 1, 2009, all other Section 232 loans were included in the new Lean process.
Information for Lenders and Borrowers
Information for both potential borrowers and lenders who wish to originate FHA Insured loans.
For Potential Borrowers
- As the FHA-Approved Lender is the key player in the process, we encourage potential borrowers to contact a lender as early in the process as possible. The lender will walk you through the process - from initial discussions to underwriting and submittal of the application to the closing of the loan. Most of the lenders on the “Approved Lender List” marked with an asterisk can originate Section 232 Lean Loans. The "Approved Lender List” is available here.
- The Section 232 Handbook provides useful Section 232 program information and is located here.
For Potential Lenders
- We require the lender to be an FHA Approved Lender, a MAP-Approved lender and the lender’s underwriter must also be a MAP-Approved Healthcare underwriter. Additional requirements for Section 232 Lean approval are detailed in Section 1, Chapter 2 of the Section 232 Handbook.
- Information on the MAP Approval process for lenders