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In light of the growing number of natural disasters and their severe impact on housing, FHA 203(h) loans are receiving renewed attention within the mortgage lending community. Unfortunately, there are many misconceptions about this HUD-approved program, even among seasoned professionals. Let’s clarify what FHA 203(h) loans are and how they can help victims of Presidentially-Declared Major Disaster Areas (PDMDA).

 

What FHA 203(h) Loans Are

Many people are familiar with FHA loans but may not realize that there are various types available. One of these is the FHA 203(h) loan, specifically designed to assist victims of a PDMDA in securing mortgage financing for their primary residence. Let’s break down some of the advantages of this loan program and why it may be a lifeline for those impacted by major disasters.

Lenders underwriting these loans are encouraged to be as flexible as possible when it comes to verifying employment, income, and assets. For example, if a borrower’s employment records were destroyed during the disaster, alternative documentation such as IRS records can be used to verify employment. Additionally, if a borrower had to take short-term employment after the disaster, that income can be used when qualifying for the loan.

Underwriters can also overlook certain derogatory credit events that occurred directly because of the disaster. Late mortgage payments on a property that was destroyed or significantly damaged can be disregarded, provided the borrower had satisfactory credit before the disaster. However, borrowers still need to meet minimum credit score requirements, as derogatory credit will still impact their score.

For homeowners whose properties were destroyed, the payment on their old mortgage may be excluded from their debt-to-income ratio when applying for a new loan. This is a significant benefit, as it helps ensure that the existing mortgage won’t hinder the borrower’s ability to get the financing they need to rebuild their lives.

Another substantial advantage of the FHA 203(h) loan is the possibility of 100% financing when purchasing a home that is not in disrepair. Importantly, the new home doesn’t need to be located in a PDMDA for the borrower to qualify for this type of financing.

 

What FHA 203(h) Loans Are Not

While HUD states that FHA 203(h) loans are meant to assist disaster victims in purchasing or reconstructing a single-family home, this statement can be somewhat misleading, which contributes to confusion about the program—even among mortgage professionals.

An FHA 203(h) loan is not a renovation loan. If a homeowner wants to reconstruct a damaged property, the FHA 203(h) loan must be combined with an FHA 203(k) Rehabilitation loan. This is where things can get confusing. FHA 203(h) loans focus on providing benefits to the homeowner or buyer whereas FHA 203(k) loans address the condition of a property.

When an FHA 203(h) loan is combined with an FHA 203(k) loan to repair or rebuild a damaged property, the buyer loses the option for 100% financing. Instead, the standard FHA requirement of a 3.5% down payment applies. This is important to note, as it is a significant disadvantage when financing repairs for a damaged home.

 

How to Apply for FHA 203(h) Financing

If you are interested in applying for an FHA 203(h) loan, your first step is to check FEMA’s list of specified affected areas. Your previous residence must have been destroyed or damaged to the extent that reconstruction or replacement is necessary, and it must be located in a Presidentially-Declared Major Disaster Area.

As with any mortgage process, it’s crucial to work with a knowledgeable and experienced mortgage loan officer. If your loan officer can’t clearly explain the difference between an FHA 203(h) and an FHA 203(k) loan, it may be time to find someone who can. Having the right guidance will help ensure you make the best decision for your situation.

 

 

This article aims to provide clarity on FHA 203(h) loans, dispelling misconceptions and offering practical insights for those affected by major disasters. By understanding the program’s benefits and limitations, disaster victims can make informed decisions as they work to rebuild their lives.


Jennifer Goldsby, NMLS #591226

VP, Renovation Lending

Diamond Residential Mortgage Corporation NMLS #186805

Equal Housing Opportunity

 

Disclaimer: The postings here reflect my personal opinion. They do not necessarily represent the opinions of Diamond Residential Mortgage Corporation and its management.