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Understanding FHA Loans for Disaster Relief

Mayra ParisJan 22, 2018

Recovering from a natural disaster can be difficult and overwhelming.

What is an FHA loan?

Actually, it's a bit of a misnomer to call it an FHA loan. The Fair Housing Administration doesn't lend money itself. What it does is insure mortgages issued by banks and private lenders. In exchange for having their loans insured by the federal government, lenders agree to ease their application requirements, which in turn makes it easier for borrowers with lower credit scores or lower incomes to qualify for a mortgage.

The traditional FHA loan is known as the 203(b) loan. This number just means the details of the loan can be found in Section 203(b) of the National Housing Act. With a 203(b) mortgage, you will be able to buy a property to serve as your primary residence. You have the option of making a smaller down payment than usual, as little as 3.5% if your credit score is 580 or higher; if your score is lower than that, the minimum down payment is 10%. The fees a lender can charge you are also limited by FHA rules, and closing costs can be included in the financing.

To take out a 203(b) loan, you must find an FHA-approved lender and specify that you would like to apply for an FHA-insured mortgage. There are limits to how much the FHA will insure, depending on the state of the housing market in your county. Once you are approved, you will be responsible for two mortgage insurance payments. The first, called the Up-Front Mortgage Insurance Premium (UPMIP), will be a lump sum payment due upon closing. The second amount, called the Annual Mortgage Insurance Premium (MIP), will be included in your monthly mortgage payment.

Buying a House After a Disaster

There are special requirements for recent disaster survivors looking to take out an FHA-insured loan to rebuild or purchase a new home. According to the FHA Single Family Housing Handbook, to be eligible, "the previous residence (owned or rented) must have been located in a PDMDA and destroyed or damaged to such an extent that reconstruction or replacement is necessary." These mortgages are called 203(h) loans.

Unlike a 203(b) loan, if your house has been severely damaged or destroyed in a disaster, such as a hurricane, major wildfire, or flood, you are not required to make a down payment towards the mortgage of your new primary residence. There are also special considerations for those whose employment records were destroyed in a disaster or who fell behind on payments because of the event. However, other 203(b) loan requirements still apply, such as having a minimum credit score of 500 and making monthly mortgage insurance payments. To qualify, you must also apply for the mortgage within one year of the disaster. Overall, this is a great option to get back on your feet after losing your home.

Repairing a House After a Disaster

If your house was damaged but not destroyed, you may want to consider a 203(k) rehabilitation mortgage. This type of loan is available for all homeowners who meet the basic requirements, not just victims of disasters. However, if you lived in a presidentially declared major disaster area during the event, the FHA will waive the requirement that the house be at least a year old. That means that if your newly constructed home was damaged in a disaster event, you would be able to take out an FHA mortgage to repair the damages.

There are two types of 203(k) rehab mortgages: the standard 203(k) mortgage and the limited 203(k) mortgage. The standard mortgage is used to remodel the home and repair damages, with a minimum loan amount of $5,000. The limited mortgage is for minor repairs, up to a maximum of $35,000.

There are also restrictions on the kinds of repairs you can cover with a 203(k) mortgage. Luxury improvements are generally prohibited. You can't add a new swimming pool, but you can repair an existing one. Barbecue pits, saunas, and gazebos are also ineligible, as they are non-permanent improvements made with a commercial purpose in mind. The Limited 203(k) mortgage also limits repairs to minor ones like rebuilding a fence, repairing a pool, and making sure the house meets minimum safety standards.

Find an FHA-approved lender in our Top 10 list.