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FHA disaster loans pay to replace ruined homes

Crissinda Ponder

The federal government backs mortgages for people who want to replace homes that were destroyed in disasters. Under the Federal Housing Administration's 203(h) program, disaster survivors can get FHA-insured loans to rebuild or to buy homes elsewhere.

With Section 203(h) loans, the FHA insures mortgages made by approved lenders to victims in presidentially designated disaster areas, according to the U.S. Department of Housing and Urban Development.

Who a 203(h) loan is for

A 203(h) mortgage may be used to finance the reconstruction of the borrower's current home or the purchase of another home elsewhere.

An FHA 203(h) loan is for the homeowner who "is looking to rebuild their home and is likely to face difficulty with being able to borrow," says Walter Walker Jr., director of education for the Housing & Education Alliance, a HUD-approved housing counseling agency in Tampa, Fla. " FHA makes it easier for them to qualify for that loan by relaxing some of their guidelines."

Eligibilty for an FHA 203(h) loan

If you did not have an FHA-insured mortgage prior to the disaster, you are still eligible to participate in the Section 203(h) program. FHA also relaxes many of its lending requirements, such as its minimum down payment.

Borrowers may receive 100 percent financing, but need to have a credit score of at least 500.

Credit history requirements are relaxed for disaster victims who may have late debt payments after the disaster, says HUD spokesman Lemar Wooley.

"FHA also relaxes employment and income requirements for disaster victims who may be forced to obtain new employment, temporary employment or who have lost employment documentation in the disaster, " he says.

Borrowers can apply for Section 203(h) with any FHA-approved lender and should provide proof that they lived in the disaster area and evidence of the destruction of their residence.

The application process is similar to FHA's standard loan program, and it takes about 30 to 90 days, Wooley says.

"In cases where you've got some issues of valuation , that's where FHA is going to be helpful -- because there may be times when you've had a whole community wiped out," Walker says. "(Non-FHA) lenders are reluctant to go back in and offer money to rebuild in there because they are afraid the value may not be there or just the opportunity to get people to come back into those neighborhoods may be difficult."

Another type of renovation loan

But what if your home needs to be repaired, and not rebuilt? FHA's Section 203(k) program, which is HUD's primary insurance program for the rehabilitation and repair of damaged single-family homes, may be right for you.

According to HUD's website, Section 203(k) allows homebuyers and homeowners to finance the purchase of a home and the cost of its rehabilitation, or to finance the rehabilitation of their current home.

When determining which program fits your recovery needs, it is necessary to assess whether you need financing for home repairs or a brand-new dwelling.

"If you're looking to purchase a home to live in -- you don't currently own one or maybe you do currently own one -- but that house that you own has not been destroyed by fire or storm or whatever … but it needs work, you can borrow enough money to bring that home up to standards that you would like it to have," Walker says, adding that the sole purpose of Section 203(k) is to remodel a home.

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