Wednesday, Apr 25, 2018
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FHA 203(h) mortgages are there when disaster strikes

Stef Donev

Contributing editor,

Hurricane season was officially here with the arrival of Alberto the first named tropical storm of 2006.

But you don t have to live on the Gulf Coast to have Mother Nature wreak havoc on your home.

There were 27 officially-declared natural disasters from Massachusetts to California by mid-June this year.

If you are stashing supplies to weather such an event, you should add to your list an understanding of the Federal Housing Administration, or FHA, disaster relief mortgage -- the 203(h) loan. You should know it exists and some basic details about it. This way, if you ever do need one, you will know help is available and how to get it.

An FHA-backed disaster-relief loan helps people who live in areas that have been declared national disasters repair or rebuild their homes. It will even help apartment dwellers and other renters whose residences were destroyed buy homes once the disaster is over.

The 203(h) loan can be used in the wake of all sorts of disasters: hurricanes, floods, tornadoes, earthquakes, landslides, mudslides, severe storms, tidal surges or anything else that the president declares a national disaster. The key is that the president must declare the incident a national disaster before this FHA loan can be used.

When the president declares an area to be a national disaster, he does so on a county-by-county basis. Mayors can declare municipal disasters and governors can declare state disasters, but only the president can declare an event a national disaster.

If your home is destroyed or severely damaged in a presidentially declared natural disaster, you can qualify for a no-down payment loan to repair or rebuild it. If you are a renter, you can qualify for that same loan to build or buy a new home.

Lenders can be more flexible with 203(h) loans, and the income and debt guidelines are more fluid because they are FHA mortgages.

The logic behind making 203(h) loans available to renters is simple. The biggest hurdle many people face in buying a home, especially a first home, is coming up with the down payment. Since no down payment is required for a disaster mortgage, all you need is an income, debt-ratio, and credit history that are good enough to convince a lender that you can and will make the monthly mortgage payments.

You do have to pay closing costs, but the 203(h) mortgage offers a bit of a break there, too. The costs can be financed -- added to the loan amount. So can the mortgage insurance premium. That s a fee that all FHA-insured loans include. That insurance, which is similar to private mortgage insurance, goes into a special fund used to pay lenders for losses they might incur if an FHA-insured borrower defaults on the loan and the lender has to foreclose. Even though the government guarantees FHA loans, no government money is used to pay claims. The money collected through MIPs takes care of that.

The program also places a 90-day moratorium on foreclosures of property directly affected by the disaster. That means that lenders cannot start a foreclosure action or finish one by actually taking possession of the house for 90 days after the disaster. That gives people a breathing space without having to worry about a lender foreclosing on their home.

Disaster victims renters and homeowners can also apply for various other types of federal and state loans and grants. Some of that money can be used to make mortgage payments.

The FHA has limits on the size of the loan origination fee a lender can charge no more than one point, or 1 percent of the total amount loaned, excluding the MIP. The FHA also sets the property inspection and appraisal fees. Disaster victims have one full year to apply for a 203(h) loan from the date of the presidential declaration.

One of the biggest problems with the 203(h) loan is finding lenders who know it exists and how it works. After all, it is only valid when the president declares an event a national disaster, and it applies only to the declared counties. When a disaster happens, there are so many announcements and different types of programs being explained that information about 203(h) loans can be lost in the shuffle.

In many cases, local lenders and their employees may have been victimized by the disaster and are trying to put their own lives and businesses in order. Lenders outside of the disaster area might not even know they are dealing with someone qualified for the 203(h) loan unless borrowers tell them. It is not uncommon for a disaster victim to have to explain what a 203(h) loan is in order to get a lender started looking for the details.

It is a government-backed loan and requires a great deal of paperwork. You will need all the paperwork you would normally need, as well as some that applies specifically to the disaster and the impact it had on you and your home.

If you are hit by a disaster, you don t have to worry about remembering all the details of the 203(h) disaster recovery loan. All you have to do is remember that it exists, and that it is there to help along with your supplies and emergency evacuation plans that you hope you will never have to use.

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