September 14, 2018
Those living in federally-declared major disaster areas may be eligible for an FHA home loan to replace or repair properties that have been damaged by the disaster such as a hurricane, floods, etc.
FHA 203(h) rehab loans are designed specifically for this purpose-the 203(h) disaster loan features no down payment, an FHA FICO score requirement of 500 or higher, and the rehab loan can only be used for principal residences only. That means owner-occupiers only.
How does the FHA 203(h) rehab loan work?
HUD 4000.1 has the rules for this type of mortgage loan. The FHA 203(h) rehab loan is quite similar to the FHA 203(k) rehab loan which is available to any financially qualified borrower who meets FHA occupancy requirements for the home. FHA rehab loans allow funds to fix, remodel, and renovate homes with approved projects.
HUD 4000.1 says of the FHA 203(h) disaster loan, “The previous residence (owned or rented) must have been located in a Presidentially Declared Major Disaster Area and destroyed or damaged to such an extent that reconstruction or replacement is necessary. A list of the specified affected counties and cities and corresponding disaster declarations are provided by the Federal Emergency Management Agency (FEMA). The purchased or reconstructed Property must be a Single Family Property or a unit in an FHA-approved Condominium Project.”
The borrower will still need to submit to a credit check even though no down payment is required and the FICO score requirement from the FHA is 500 or better. Additional lender standards may also apply.
The no down payment feature of FHA rehab loans for disaster victims assumes the borrower is applying for an FHA rehab loan only; these loans may be used on conjunction with a typical FHA 203(k) rehab loan, but any down payment required on the “typical” rehab loan will apply in cases where the disaster version of the loan is applied for along with the typical rehab mortgage.
The credit check may be difficult for the lender to do in a traditional manner depending on the availability of certain documentation following a major disaster, but the lender is required to do the best they can with the tools available.
Borrowers may need to bring supporting documentation when available; the lender will instruct the borrower how to proceed in this area.
The FHA 203(h) rehab loan for disaster victims is contingent upon the area being named as a federal disaster area; if this has not happened yet the borrower must ask the lender how to proceed if and when such a declaration is made.
In any case, borrowers who have home loans affected by a natural disaster should get in touch with the participating FHA lender immediately to make arrangements for loan forbearance or other necessities that may be required in the aftermath.
The FHA 203(h) rehab loan may be an important part of that process for some home owners.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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