What Is the FHA 203(h) Loan Program?

The FHA 203(h) loan program allows people whose homes were destroyed or severely damaged by a natural disaster to get a new mortgage loan with zero down payment, provided their previous home was in a federally declared disaster area.

The FHA 203(h) loan program was specifically designed to allow people affected by the disaster to become re-established as homeowners as quickly and efficiently as possible.

How the FHA 203(h) Program Works

 The FHA 203(h) mortgage program insures the total cost of the mortgage, so banks can comfortably loan any amount up to the full purchase price of a house, knowing that if the buyer defaults, they can get their money back.

That’s the technical side. What it means for you is that you can get a mortgage for a replacement house without coming up with a big down payment.

Who Can Qualify for a Government Disaster Loan (FHA 203(h))?

  To qualify for an FHA government disaster mortgage loan, you must meet the following qualifications:

• Your previous house must have been destroyed or severely damaged to the point where it must be replaced, not just repaired.

• Your previous house must be located in a Presidentially declared disaster area. You can search here to determine whether your house was located within a disaster area.

• Your previous home must have been owned or rented by you and must have been your primary residence (investment properties don’t qualify)

• You must live in the new home as your primary residence

• Your new home does NOT have to be within the declared disaster area and does not have to be on the same property

• You don’t need to use this option immediately. Eligibility goes from the date the President declares it a disaster area until one year from that date

• You can use this program either to buy an existing home or to build a new house

Important Things to Note About the FHA 203(h) Program

If you choose to apply for this program, you should note that:

• You are getting a classic FHA loan, just with a lower minimum down payment requirement.
  
• FHA loan limits apply for the market where you are buying.
  
• The mortgage insurance is not free – you will have to pay for it
  
• You will still have to qualify for the FHA mortgage, so you will need a steady income source, a credit score above 580, good credit, and you will have to meet other mortgage requirements to qualify.
  
• Some mortgage qualification requirements are relaxed. For example, late payments made after the disaster may be ignored in underwriting, and different types of proof than normal may be accepted if your records were destroyed in the disaster
  
• These loans are fixed rate, not ARM loans.
  
• You don’t have to get a 30-year loan. You can get a 10-year, 15-year, 20-year, 25-year, or a 30-year loan.
  
• These types of loans can be applied to single-family residences, manufactured homes, PUDs (planned unit developments,) or even FHA-approved condominium units.

Situations Where You May Want to Use an FHA 203(h) Loan

I’ve given you a bunch of different technical requirements in this article – now let’s step back and think about when you might want to use a federal disaster loan like this.

• You want to tear down your old home and build a new one on the same property or a different piece of land.
• You don’t want to go through the hassle of building a new home when everyone else in the community is trying to do the same thing (taxing the local builders and increasing your build costs and timing,) so you decide to buy an existing home either in the same community or someplace else.
• You know you have an insurance settlement coming on your old home, but don’t want to wait until it comes in, so you can get this type of mortgage now, then use the insurance payment to pay down that new mortgage when it arrives.
• You were in a rental property destroyed in the disaster and want to use this opportunity to get into a house with zero down payment.
• Dealing with everything is just too overwhelming in the initial days and months after the disaster, but you can get to the point of creating some kind of permanent living condition within 12 months after the disaster declaration.

This is a powerful program that can be a significant advantage to you if you are a victim of a disaster.