December 5, 2013
Whenever a natural disaster strikes and the affected counties become federally-declared disaster areas, one source of help comes from FHA loan programs such as the FHA 203(k) Rehab loan. There may also be FEMA, state and local assistance for borrowers trying to recover from storm damage or other disaster-related problems.
Some can’t rehab a damaged home and must look for a new place to live. When it comes to new purchase FHA loans, could certain types of disaster relief count as a legitimate source of down payment funds?
If those sources meet FHA approval, the answer could be yes. According to HUD 4155.1, Chapter Five Section B, “Grants or loans from state or Federal agencies, such as the Federal Emergency Management Agency (FEMA), that provide immediate housing assistance to individuals displaced due to a natural disaster, may be used for the borrower’s cash investment.”
Additionally, “Secured or unsecured disaster relief loans administered by the Small Business Association (SBA) may also be used. If the SBA loan will be secured by the property being purchased, it must be clearly subordinate to the FHA-insured mortgage.”
This is good news for anyone considering their FHA loan options in the wake of a natural disaster. Borrowers may also have “compensating factors” that could help when trying to purchase a new home in such cases; if you are expecting an insurance settlement on property that was damaged or destroyed by a natural disaster, be sure to let your participating FHA lender know about any pending payments you might be owed.
For those considering a state or federal loan as part of the down payment, it’s very important to remember one thing mentioned in Chapter Five Section B–any financial obligation you incur as a result of taking out such a loan must still be counted against your debt-to-income ratio. Chapter Five says this quite clearly. ”
Any monthly payment arising from this type of loan must be included in the qualifying ratios.” Naturally, a government grant which does not have to be repaid would be a different matter altogether. If there is no debt, there is nothing to add to the debt-to-income ratio in the “debt” column.
Talk to your loan officer about options for down payment funds in cases like these, or contact the FHA directly for more assistance.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get preapproved for an FHA loan at www.FHA.com, a private company and not a government website.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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