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HUD   >   Federal Housing Administration   >   Healthcare Programs   >   Section_232   >   232 LEAN Processing Page   >   Underwriting Guidance   >   Frequently Asked Questions   >   Change to the Definition of Indebtedness and Eligible Existing Indebtedness Under Lean 232
LENDER NARRATIVE (pg 49) PROGRAM GUIDANCE
Key Question 2 - Two Year Rule

Any debt to be refinanced that is less than 24 months old will have to be investigated and must meet the definition of "Eligible Existing Indebtedness" below.

Definition of Eligible Existing Indebtedness: Existing indebtedness in a refinancing transaction is defined as:
1. Outstanding mortgage(s) incurred in connection with the construction or purchase of the project, or with capital improvements made to the property as confirmed by the current mortgagee.

2. Other recorded indebtedness such as mechanic's liens and tax liens provided they did not result from personal obligations of the mortgagor.

3. Unrecorded debt directly connected with the project supported by documentation from the mortgagor. If the indebtedness is not recorded, the mortgagor must provide the Lender with documentation which unquestionably indicates that the obligation is directly connected to the project. Examples include: indebtedness incurred in making needed improvements and betterments to the property.

4. Other eligible costs associated with paying off the existing debt. Examples are:
a. Delinquent and accrued interest;
b. Prepayment penalties on the mortgage;
c. Reasonable and customary legal, organizational, title, and recording expenses;
d. Initial financing fee not to exceed 2% of the original principal amount of the mortgage.

HUD UNDERWRITING PUNCH-LIST:(pgs. 18-19)

Two-Year Rule: Any debt to be refinanced that is less than 24-months old will have to be investigated and must meet the definition of "Eligible Existing Indebtedness" below. Note: in the case of refinancing a bridge loan, as long as there is not identity of interest between the Mortgagor/Borrower and the underwriting HUD lender and/or its affiliated bridge lender, the refinance transaction may be treated under the Two-Year Rule.

Definition of Eligible Existing Indebtedness: Existing indebtedness in a refinancing transaction is defined as:
1. Outstanding mortgage(s) incurred in connection with the construction or purchase of the project, or with capital improvements made to the property as confirmed by the current mortgagee.

2. Other recorded indebtedness such as mechanic's liens and tax liens provided they did not result from personal obligations of the mortgagor.

3. Unrecorded debt directly connected with the project supported by documentation from the mortgagor. If the indebtedness is not recorded, the mortgagor must provide the Lender with documentation which unquestionably indicates that the obligation is directly connected to the project. Examples include: indebtedness incurred in making needed improvements and betterments to the property.

4. Other eligible costs associated with paying off the existing debt. Examples are:
a. Delinquent and accrued interest;
b. Prepayment penalties on the mortgage;
c. Reasonable and customary legal, organizational, title, and recording expenses;
d. Initial financing fee not to exceed 2% of the original principal amount of the mortgage.