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Home Loans For Disaster Recovery

Amy Fontinelle

When a natural disaster destroys or seriously damages your home and your insurance policy doesn't provide all the financial assistance you need, where can you turn for help? Four government programs offer rebuilding assistance: the 203(h) loan, 203(k) loan, SBA loans and the Individuals and Households program. This article will explore the types of repairs these loans can fund, their eligibility requirements, and how to apply.

203(h) Loans
If you've lost your home and want to rebuild or purchase a different one, take a look at the 203(h) loan. This FHA-insured mortgage can be used to rebuild destroyed or severely damaged homes or to purchase a different home. To qualify, your home be damaged to the point of requiring reconstruction or replacement and be located in a presidentially-designated disaster area. You must apply to an FHA-approved lender within a year of the president's disaster declaration.

203(h) loans can be used only for single-family primary residences, but they do allow for 100% financing. If you're using the loan to buy a different home and not to rebuild your damaged home, you're allowed to receive up to 6% of the purchase price from the seller to put toward your closing costs and prepaid expenses (homeowners insurance and property taxes).

A drawback is you'll pay both an up-front mortgage insurance premium and monthly mortgage insurance premiums. Only the up-front premium can be financed and the loan amount cannot exceed the FHA's limits for your area.

203(k) Loans
The FHA 203(k) loan was designed for individuals looking to rehabilitate or repair a damaged home intended to be the person's primary residence. These loans are often used to fix up damaged foreclosures and other run-down homes. They can also be used to repair homes damaged by severe weather events and other natural disasters. If you don't have enough money to repair your disaster-damaged home, you can get the money by refinancing with a 203(k) loan.

The loan will include enough money to pay off your existing mortgage and to pay for the materials and labor required to make repairs. The maximum loan amount cannot be more than what the property is expected to be worth after repairs, as determined by a professional appraiser. If the home is so damaged that it's uninhabitable until at least some repairs are completed, you'll be glad to know the 203(k) loan allows you to borrow up to six months' worth of mortgage payments. This provision makes it possible for you to live somewhere else during construction.

Single-family to four-family dwellings and FHA-approved condos are eligible as long as they were built at least a year ago and the original foundation will be used. The repairs must meet HUD's Minimum Property Standards (which include energy efficiency and safety standards) as well as your city's codes and ordinances.

203(k) loan funds cannot be used for swimming pools, barbecue pits, and certain other items that the FHA considers luxuries. The money will get you a home you can live in again, however, and you can build an upgraded version of your former home. The 203(k) loan also is less restrictive than some of your other options. For example, the home does not have to be located in a presidentially-declared disaster area to qualify for financing.

You must apply to an FHA-approved lender. It also helps to find a 203(k) loan specialist since these loans can be complex. Like the 203(h) loan, the 203(k) loan requires borrowers to pay both an up-front mortgage insurance premium and monthly mortgage insurance premiums. Only the up-front premium can be financed.

SBA Loans
The Small Business Administration provides "low-interest, long-term loans for losses that are not fully covered by insurance or other recoveries." Despite the agency's name, these loans can indeed be used for repair or replacement of disaster-damaged homes.

The SBA's disaster recovery loans are much more restrictive than 203(k) loans. Loans are limited to $200,000, and the damaged home must be located in a declared disaster county. Also, these loans cannot be used for upgrades, only repairs. The exception is upgrades to provide better protection against "possible future disasters of the same kind." The SBA also offers loans of up to $40,000 to replace destroyed personal property such as furniture, clothing and cars. Apply online, or in person at an SBA office.

Individuals and Households Program
If insurance or other forms of disaster assistance aren't enough to help your situation, you can try the federal government's Individuals and Households Program. If the damaged home is your permanent residence and is located in a presidentially-declared disaster area, you may receive funds. These can be used toward temporary housing, repair or replacement of damaged housing, replacement of personal property, moving expenses, medical expenses, and death expenses. This program, however, is not designed to provide 100% assistance with disaster-related expenses. Apply through FEMA online or by phone.

The Bottom Line
If your home was severely damaged by a natural disaster and you don't have the financial resources to repair it, a number of government assistance programs may provide you with the funds you need. You'll likely have to jump through numerous bureaucratic hoops to obtain these loans. You'll also pay interest on the money you borrow, but if your cash reserves or insurance settlement are insufficient to cover all the repairs, the trouble and expense may be worth it.

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