The FHA 203(h) Mortgage Program enables borrowers that live in Presidentially designated disaster areas whose homes were destroyed or seriously damaged to purchase a home or rebuild their home with no down payment as compared to the 3.5% down payment required for a standard FHA loan and the 10% - 20% down payment typically required by most conventional mortgage programs. It is important to highlight that if you use the FHA 203(h) Program to buy a new home, the new home does not need to be located in a disaster area. The program can also be used to refinance a mortgage on a home that was not destroyed in the disaster but requires repairs, renovations or reconstruction.
The ability to use an FHA 203(h) mortgage to rebuild or reconstruct your home after it has been damaged by a disaster is a unique feature of the program and highly valuable to borrowers that reside in disaster zones. Other advantages of the FHA 203(h) Program include lower mortgage rates and more flexible mortgage qualification requirements, including a lower required credit score. The FHA 203(h) Program makes getting a mortgage and buying new homes more affordable for victims of natural disasters.
The main downside of an FHA 203(h) loan is that it requires the borrower to pay an upfront and ongoing annual FHA Mortgage Insurance Premium (MIP), like a standard FHA loan. MIP is an additional upfront and recurring monthly cost for borrowers but the ability to buy a home with no down payment and lower mortgage rates on FHA loans should offset this extra expense for disaster victims looking to get back on their feet and buy a new home.
Although the FHA determines FHA 203(h) Mortgage guidelines, borrowers apply for the program through approved lenders such as banks, mortgage banks, mortgage brokers and credit unions. These approved lenders make sure that applicants meet program eligibility and qualification requirements. The table below compares leading FHA lenders in your area. We recommend that you contact multiple lenders to determine if they offer FHA 203(h) mortgages and to request loan terms and requirements. Because the program is specialized we advise you to work with a lender with a track record of successfully processing and closing FHA 203(h) loans.
Borrowers that reside in an area that was designated by the President as a disaster area and whose homes were destroyed or significantly damaged are eligible for the FHA 203(h) Program. Borrowers are required to submit their loan application for the program, including proof of damage to their home, within one year of the President declaring the area a disaster area.
Borrowers must meet certain requirements to qualify for a FHA 203(h) Loan. The qualification guidelines are similar to a standard FHA Loan and we review the key requirements below.
When a borrower applies for a FHA 203(h) Loan, lenders are permitted to use a "direct endorsement" which enables them to evaluate an application without sending additional information or documentation to the FHA. This helps streamline the mortgage process so that borrowers can close their mortgage more quickly, which is especially important for disaster victims.
Credit Score and Disaster-Related Credit Issues
The minimum credit score required for a FHA 203(h) Mortgage is 500 which is lower than the credit score typically required for a standard FHA loan. The minimum credit score required to qualify for the program is also lower than most other government-backed and conventional mortgage programs, which aids disaster victims who may also be dealing with credit challenges.
The FHA 203(h) Program is also much more flexible as it relates to credit issues that are attributable to the natural disaster. For example, borrowers may struggle to pay their mortgage and other bills in the wake of a disaster. According to program guidelines, lenders may disregard derogatory credit events that resulted from the disaster as well as late mortgage payments as long as the borrower was no more than three months delinquent on their mortgage at the time of the disaster. In general the credit qualification guidelines for the program are very accommodating for borrowers.
Borrower Debt-to-Income Ratio
Lenders typically use a debt-to-income ratio of 43% to determine what size FHA 203(h) mortgage borrowers can afford, although it is possible to qualify for an FHA loan with a debt-to-income ratio of 50% or higher under certain circumstances . The debt-to-income ratio represents the maximum percentage of a borrower's monthly gross income that can be spent on total monthly housing expense plus other monthly debt payments such as credit card, auto and student loans. Total monthly housing expense includes your mortgage payment, property taxes, homeowners insurance, FHA mortgage insurance premium (MIP) as well as other potentially applicable expenses such as homeowners association (HOA) fees.
The higher the debt-to-income ratio applied by the lender, the larger the mortgage you qualify for. Circumstances under which it is possible to get approved for an FHA 203(h) Loan with a debt-to-income ratio of 50% or higher include borrowers with excellent credit scores or job histories, borrowers making larger down payments and borrowers with supplemental sources of income that may not be reflected on their mortgage application, such as from a spouse or part-time work.
Please note that lenders may exclude the mortgage payments on a borrower's destroyed or severely damaged home when calculating the debt-to-income ratio used to determine what size mortgage the borrower can afford. Excluding the payments on your current residence can significantly improve your ability to qualify for a mortgage or enable you to afford a higher loan amount. In this case the FHA 203(h) lender is required to verify that the borrower is working with their existing lender to address the mortgage on the damaged or destroyed home. Additionally, any homeowners insurance payouts must be applied to the mortgage on that property.
Borrower Income Limit
Unlike some other government-backed and conventional mortgage assistance programs, the FHA 203(h) Program does not apply borrower income limits.
Borrower Financial Reserves Requirement
The program does not require borrowers to hold minimum funds in reserve at the time the mortgage closes; however, FREEandCLEAR recommends that you hold sufficient funds in reserve to cover three-to-six months of total monthly housing expense. Financial reserves provide a cushion in the event borrowers face unexpected financial challenges after their mortgage closes.
Borrower Employment History Requirement
Borrowers are typically required to have two years of continuous employment history to be eligible for a FHA 203(h) mortgage; however, lender requirements may be more flexible for borrowers who lost their job or who took on temporary work as a result of the natural disaster. For example, lenders can include income from short-term employment which boosts the borrower's ability to qualify for the program.
Lenders are also typically more lenient if borrowers cannot verify their employment history because their employment documentation was destroyed in the disaster. Additionally, exceptions to the two year work history requirement may be made for borrowers who were in the military or who recently graduated from college or graduate school as both military service and full-time education typically count as employment history when you apply for a mortgage. Explainable employment gaps such as seasonal jobs or situations where the borrower has returned to their job after an extended absence may be permitted under certain circumstances.
Verification of Employment, Income and Assets
As noted above, lenders are permitted to use alternative documentation or sources to verify a borrower's employment, income and assets if the borrower's personal or financial information was destroyed in the natural disaster.
First-Time and Repeat Home Buyers
The FHA 203(h) Loan Program is available to both first-time and repeat home buyers as compared to other mortgage assistance programs that are only available to first-time buyers.
Home Buyer Education Class
The FHA 203(h) Loan Program does not require that borrowers take a home buyer education class but the FHA recommends that borrowers contact an HUD-approved housing agency if they are interested in taking a class or receiving home buying counseling. The class focuses on helping borrowers understand how mortgages work as well as the financial commitment required by owning a home.
Use the FREEandCLEAR Lender Directory to find top-rated lenders that offer FHA mortgages.
The interest rate you pay on an FHA 203(h) mortgage depends on several factors including your credit score and loan-to-value (LTV) ratio. Borrowers with higher credit scores receive lower mortgage rates while borrowers with lower credit scores and higher LTV ratios pay higher rates. For borrowers with good credit scores, FHA 203(h) mortgage rates are typically .125% - .500% lower than the rate for a conventional loan. The mortgage rate is lower because the program is backed by the government and borrowers are required to pay mortgage insurance. Borrowers should shop multiple lenders to find the FHA 203(h) mortgage with the lowest rate and closing costs.
Closing Costs and Extra Fees
The program charges standard closing costs and fees. Additionally, aside from the upfront and monthly FHA mortgage insurance premium, borrower are not required to pay extra costs to participate in the program. According to FHA 203(h) Program guidelines, borrowers can pay for closing costs out-of-pocket, by paying a higher mortgage rate or the seller can pay for all or part of closing costs up to a maximum of 6% of the loan amount.
Along with their mortgage payment, the FHA 203(h) Program requires borrowers to pay property tax, homeowners insurance and mortgage insurance premium (MIP) into an impound account on a monthly basis. An impound account is a trust account controlled by the lender from which expenses such as taxes and insurance are paid when due. The impound account does not affect the amount of fees the borrower is required to pay for the mortgage.
The FHA 203(h) Program requires that borrowers pay an upfront and ongoing monthly mortgage insurance premium (MIP) which protects lenders against losses that result from defaults. The upfront MIP for most FHA loans is 1.75% of the loan amount and can be added to the mortgage amount. The ongoing MIP is similar to private mortgage insurance (PMI) and is an additional monthly cost to the borrower on top of your mortgage payment. The ongoing monthly MIP fee depends on mortgage amount, loan-to-value (LTV) ratio and mortgage length with the shorter the mortgage term and lower the LTV ratio, the lower the fee.
Only 15 and 30 year fixed rate mortgages and 1 year, 3/1, 5/1, 7/1 and 10/1 adjustable rate mortgages (ARMs) are eligible for the program while interest only mortgages are not eligible.
The program applies to both home purchase mortgages as well as refinances. Additionally, an FHA 203(h) Loan can be used for both purchase or reconstruction of a single family home. The ability to use the program to rebuild your home is especially important in disaster areas.
There are limits to the size of mortgage you can obtain through the FHA 203(h) Loan Program. There is one set of loan limits for the 48 contiguous states, the District of Columbia and Puerto Rico and a higher set of loan limits for Alaska, Hawaii, Guam and the U.S. Virgin Islands. For the 48 contiguous states, the District of Columbia and Puerto Rico the FHA loan limit for a single unit property ranges from $314,827 to $726,525 in high cost areas.
The FHA 203(h) Program only applies to owner-occupied single family properties such as homes, condominiums and co-ops. Investment properties as well as second and vacation homes are not eligible for the program.
The FHA 203(h) Program can also be combined with the FHA 203(k) Home Renovation Program. The FHA 203(k) Program enables borrowers to finance the purchase or refinancing of a home plus the cost of a major home rehabilitation, improvement or remodeling project with a single FHA loan. Typically borrowers seeking to finance a major home improvement project are required to obtain a separate construction or home equity loan which can be expensive and time-consuming. Additionally, the loan amount for an FHA 203(k) mortgage is based on the as-completed, post-renovation value of the property which enables borrowers to qualify for a larger loan amount. Please note that if the FHA 203(h) Program is used with the FHA 203(k) Program, the guidelines for the FHA 203(k) Program apply, which means the borrower is required to make a minimum down payment of 3.5% of the as-completed property value for a purchase or have at least 2.25% equity in the property for a refinance.
Related FREEandCLEAR Resources
FHA 203(h) Program Guidelines: https://www.hud.gov/program_offices/housing/sfh/ins/203h-dft