FHA/VA Federal Disaster Policies and Loan Assistance

Written By: Stacey Sprain,
Certified Ambassador Loan Processor (CALP)

This week’s topic came easily to me because of the turbulent weather so many areas of the country have been experiencing this spring season. It seems we can’t pick up a newspaper or view the Weather Channel lately without seeing some mention of severe thunderstorms, tornado warnings, and flood damage in addition to areas with wild fires and now hurricane season on top of it all. Many areas of the country have been declared federal disaster areas in recent weeks.

Some lenders are very proactive when it comes to communicating federally declared disaster areas and issue regular bulletins announcing and reiterating their own disaster area policies. However, most actually leave it up to us as originators, processors and underwriters to be aware of the federal disaster zones within the U.S. The current problem with that is that missing one night’s evening newscast could mean you may not be aware of disasters that have occurred that very day!

For files in process that include a property that falls within a disaster area, most lenders will require an additional drive by appraisal certification by an appraiser prior to closing in order to certify that the property still exists without major damage. In addition, the lender will likely require that the borrowers sign a certification statement or hold harmless statement at closing stating that they are accepting the property in as-is condition without holding the lender liable for any property damage. It’s important that we as originators, processors and underwriters assure that the subject property has not sustained damage related to the storms that have affected the particular area where the property is located.

I had an interesting situation that came up back in 2005 worth mentioning because it clearly demonstrates why knowledge of the lender’s policy is so important. I had a loan in process for purchase of a single family residence in the state of Florida back in 2004-2005 when the hurricanes hammered Florida’s coast. The lender had issued a specific bulletin requiring a re-inspection of the properties in that area prior to closing. The day before this particular loan was supposed to close, I had to send the appraiser back out to the property. He called from his cell phone to let me know that the house was literally GONE. The hurricane had directly devastated the property.

I therefore called the borrowers to let them know and they were actually aware that the house had been destroyed but were disappointed that we wouldn’t allow them to close because they still had intended to purchase the property! The interesting thing was that these borrowers were financing 100% and had very minimal reserves to begin with. (To this day I have no idea how on earth they were thinking they could possibly have afforded the land and then additional financing that would have been required for them to construct a new home at the site!) I explained to them that we simply could not allow financing on the property because there was no home left with which to secure the lien for the mortgage. If that lender hadn’t issued that bulletin with their policy for re-inspection, this particular loan may have closed and funded on a property where no structure existed! Thus, why these policies are so extremely important to be aware of.

FHA also offers a special financing program for victims who suffer property damage in disaster areas as a direct result of natural disasters. Let’s take a look at that option.

FHA/HUD
Due to the major hurricanes of 2005, HUD issued Mortgagee Letter 2005-33 which outlines Underwriting and Servicing Policies to Assist Victims of Presidentially-Declared Major Disaster Areas. You will find additional information on HUD’s 203h program for disaster victims at http://www.hud.gov/offices/hsg/sfh/ins/203h-dft.cfm and also within HUD Handbook 4155.1, Chapter two, section 2-18.

The 203h program allows 100% financing for one-unit detached properties, for HUD approved condominium units or units eligible for spot loan condominium approval. The program requires no downpayment for individuals whose homes are located in federally declared disaster areas where the homes have been damaged or destroyed to the extent where reconstruction or replacement is necessary. The program may be used to purchase or rebuild an existing home that the borrowers occupy or will occupy as their primary residence. Closing costs and prepaids cannot be financed but may be paid through premium pricing by the lender or through seller credit with a six percent contribution limitation. The up-front MIP may be financed and monthly mi applies, just as with standard FHA financing. Standard FHA maximum mortgage financing limits apply and can be found by searching HUD’s max mortgage site at https://entp.hud.gov/idapp/html/hicostlook.cfm.

HUD allows ratios for this program to go a bit higher than the standard 31/43 ratios-they look at a standard 45% ratio and will allow higher with compensating factors.

This program also allows use of Disaster Relief Grants and Loans for closing funds or downpayment. Grants or loans from state and federal agencies [e.g., Federal Emergency Management Agency (FEMA)] that provide immediate housing assistance to individuals displaced due to natural disaster may be used for the borrower's cash investment. Secured or unsecured disaster relief loans administered by the Small Business Administration (SBA) also may be used. However, if the SBA loan will be secured against the property being purchased, it must be clearly subordinate to the FHA-insured mortgage. Any monthly payment arising from such a loan must be included in the qualifying ratios.

Note that you will need to check with your lender(s) to make sure they offer the 203h program.

HUD offers a special website which contains a great deal of helpful information regarding disaster recovery which is also worth mentioning. Go to http://www.hud.gov/offices/hsg/sfh/owning.cfm where you will find links to additional information on natural disasters.

VA
You will find Veteran’s Affairs policy on natural disasters at: Click Here>>. Essentially, for files in process that contain a property located within a federally declared disaster area, VA will require a specific Lender Certification form to be signed certifying that the property has been verified to be unaffected by the natural disaster or restored to its pre-disaster condition or better. The form also requires signature from the veteran indicating his/her certification that he/she accepts the property in as-is condition at the time of loan closing.

Many other areas of loan files can be affected when natural disasters occur. There is potential for the borrower’s employer or place of employment to be affected which can in turn, affect income for qualifying. There is the potential for a property’s value to decline once it has been affected by a natural disaster. Numerous components of the loan file can be affected even if the subject property is not. These are all things you want to keep in mind when these situations occur.

The Federal Emergency Management Agency, better known as “FEMA” maintains a listing of all federally declared disaster areas at http://www.fema.gov/news/disasters.fema where you are able to search by choosing search criteria to determine those areas of a particular state or region. Right now, with our consistent bad weather patterns across the country, I would strongly suggest working a check on this website into your daily or at least weekly workflow. This would be especially important for contract processors who are processing files for multiple states and/or multiple areas on the country. It’s important that we are aware of the areas affected by thunderstorms, tornadoes, flooding, tropical storms and hurricanes so that we can stay on top of our lender policies and requirements that apply to properties we may be in the process of financing.

How can you offer help to anyone who has been affected by any of the recent disasters across the U.S.? Assist them with direction to: Click Here>> where you can relay important information to them that may be helpful to them in their time of need.

There are many opportunities out there right now to step in, offer your help and make a difference in the lives of our country’s disaster victims!

About the Writer. As one of NAMP's volunteer writers, Stacey Sprain is currently a NAMP member in good standing and is a NAMP Certified Ambassador Loan Processor (CALP). If you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.