FHA Rehab Loans After 2017 Hurricanes Harvey and Irma
Some are in the process of repairing bad credit, catching up on mortgage payments, or trying to improve other aspects of their credit report when a natural disaster strikes. The complication of trying to salvage a home damaged in a natural disaster can make some borrowers worried that they won’t be able to get the financial help they need to recover from a hurricane, mudslide, forest fire, etc.
Do FHA loan rules for credit qualifications take the added problems of a natural disaster into account when a borrower is applying for FHA 203(h) rehab loans in federally-declared disaster areas?
Credit Requirements for 203(h) Rehab Mortgage Loan Approval
After a natural disaster, FHA lenders have the option of offering FHA 203(h) rehab loans to those in federal disaster areas. The FHA loan handbook, HUD 4000.1, allows more credit flexibility for 203(h) rehab loans and refinance loans, but that flexibility is governed by guidelines in HUD 4000.1:
“The Mortgagee should be as flexible as prudent decision making permits. The Mortgagee is required to make every effort to obtain traditional documentation regarding employment, assets, and credit, and must document their attempts. Where traditional documentation is unavailable, the Mortgagee may use alternative documentation…”
How is a lender to process rehab loans for applicants with derogatory credit information on their credit reports?
“For Borrowers with derogatory credit, the Mortgagee may consider the Borrower a satisfactory credit risk if the credit report indicates satisfactory credit prior to a disaster, and any derogatory credit subsequent to the date of the disaster is related to the effects of the disaster.” As you can see, pre-disaster credit activity is very important.
Verifying Income/Employment for a 203(h) Rehab Loan
Job data may be harder to obtain after a hurricane or flood. Participating FHA lenders are required to anticipate problems verifying income-something that is key to getting FHA loan approval.
“If prior employment cannot be verified because records were destroyed by the disaster, and the Borrower is in the same/similar field, then FHA will accept W-2s and tax returns from the Internal Revenue Service (IRS) to confirm prior employment and income. The Mortgagee may also include short-term employment obtained following the disaster in the calculation of Effective Income.”
If you anticipate needing to apply for a rehab loan, it may be best to order such tax records from the IRS or locate your personal copies as soon as possible to avoid delays in processing your loan.
Debt-to-income Ratio Issues
FHA 203(h) loan rules include guidance to the lender about a loan applicant’s existing mortgage payment and how it may be viewed when calculating the debt-to-income ratio. Under normal circumstances, a mortgage payment would be included in the borrower’s debt to income ratio. But for disaster recovery, the rules are different.
"When a Borrower is purchasing a new house, the Mortgagee may exclude the Mortgage Payment on the destroyed residence located in a (federal disaster area) from the Borrower’s liabilities. To exclude the Mortgage Payments from the liabilities, the Mortgagee must:
-obtain information that the Borrower is working with the servicing Mortgagee to appropriately address their mortgage obligation; and
-apply any property insurance proceeds to the Mortgage of the damaged house.”
Those rules apply specifically for FHA 203(h) rehab loans. Ask your loan officer if you aren’t sure how these rules will affect your transaction.
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