Disaster relief mortgages can help you rebuild

Palm trees swaying in wind

No one expects their home to be ravaged by a natural disaster.

But it happens. And all too many times repairs or rebuilding costs more than insurance will pay. That's a particular problem for homes damaged by floods and not protected by flood insurance.

That's why everyone should know about a little-known government program that will provide the extra money you need to fix or replace your home. It will even help apartment dwellers and other renters whose residences were destroyed buy homes once the disaster is over.

The Federal Housing Administration's 203(h) disaster relief mortgage requires no down payment and can be used in the wake of all sorts of disasters: hurricanes, floods, tornadoes, earthquakes, landslides, mudslides, severe storms or tidal waves.

The only requirement is that the home must be in an area where the president has declared a national disaster.

Once he's done that lenders can begin offering 203(h) loans with more flexible income and debt guidelines than other loans.

The logic behind making 203(h) loans available to renters is simple. The biggest hurdle many people face in buying a home, especially a first home, is coming up with the down payment.

Since no down payment is required for a disaster mortgage, all you need is an income, debt-ratio, and credit history that are good enough to convince a lender that you can and will make the monthly mortgage payments.

You do have to pay closing costs, but the 203(h) mortgage offers a bit of a break there, too. The costs can be financed -- added to the loan amount. So can the mortgage insurance premium. That's a fee that all FHA-insured loans include. That insurance, which is similar to private mortgage insurance, goes into a special fund used to pay lenders for losses they might incur if an FHA-insured borrower defaults on the loan and the lender has to foreclose. Even though the government guarantees FHA loans, no government money is used to pay claims. The money collected through mortgage insurance takes care of that.

The program also places a 90-day moratorium on foreclosures of property directly affected by the disaster. That means that lenders cannot start a foreclosure action or finish one by actually taking possession of the house for 90 days after the disaster. That gives people a breathing space without having to worry about a lender foreclosing on their home.

Disaster victims renters and homeowners can also apply for various other types of federal and state loans and grants. Some of that money can be used to make mortgage payments.

The FHA has limits on the size of the loan origination fee a lender can charge no more than one point, or 1% of the total amount loaned, excluding the mortgage insurance. The FHA also sets the property inspection and appraisal fees. Disaster victims have one full year to apply for a 203(h) loan from the date of the presidential declaration.

One of the biggest problems with the 203(h) loan is finding lenders who know it exists and how it works. After all, it is only valid when the president declares an event a national disaster, and it applies only to the declared counties. When a disaster happens, there are so many announcements and different types of programs being explained that information about 203(h) loans can be lost in the shuffle.

In many cases, local lenders and their employees may have been victimized by the disaster and are trying to put their own lives and businesses in order. Lenders outside of the disaster area might not even know they are dealing with someone qualified for the 203(h) loan unless borrowers tell them. It is not uncommon for a disaster victim to have to explain what a 203(h) loan is in order to get a lender started looking for the details.

It is, after all, a government-backed loan, and requires a great deal of paperwork. You will need all the paperwork you would normally need, as well as some that applies specifically to the disaster and the impact it had on you and your home.

If you are hit by a disaster, you don't have to worry about remembering all the details of the 203(h) disaster recovery loan. All you have to do is remember that it exists, and that it is there to help your supplies and emergency evacuation plans you hope you will never have to use.