The U.S. Department of Housing and Urban Development (HUD) recently announced an update in
Mortgagee Letter 2025-20 around the definition of “Substantial Rehabilitation” in the Section 232 Program.
The Section 232 Program has long provided a mortgage insurance vehicle for new construction and substantial rehabilitation of residential care facilities. As noted in the Mortgagee Letter, HUD is narrowing the definition of “Substantial Rehabilitation” in the Section 232 Program in several respects. First, it is eliminating the language providing that “substantially” replacing “two or more major building components” could itself suffice as “substantial rehabilitation.” HUD noted that the language has long been a source of confusion and uncertainty as, for example, all parties attempted to determine in any specific context what constituted a “major building component,” and what degree of rehabilitation thereof was “substantial.”
Secondly, HUD addressed the “repairs, replacements and improvements” definitional element. Prior to the Mortgagee Letter, the 232/223(f) program had a limitation on the amount of repairs that could be included in the mortgage. That limitation was that repair costs could not exceed 15% of value after completion of the repairs. Under the new definition, that limit increased to 25%.
This
Mortgagee Letter is effective immediately as to all applications submitted on or after September 16, 2025.