California Wildfire Victims Eligible for No Downpayment Mortgage?
The devastating California Wildfires have made Thanksgiving, and the upcoming holidays, a little more challenging for many affected families.
A Presidentially-Declared Major Disaster Area (PDMDA) was declared in on November 12th, 2018 for Butte, Los Angeles, and Ventura Counties.
Among access to other Federal Assistance, displaced homeowners and renters now have access to the FHA 203(h) which allows mortgage insurance up to 100% financing for the purchase, or refinance of a disaster affected family.
Eligible for Disaster Relief Mortgage
- Butte County – Until November 11th, 2019
- Los Angeles County – Until November 11th, 2019
- Ventura County – Until November 11th, 2019
A list of the specified affected counties and cities and corresponding disaster declarations is provided by the Federal Emergency Management Agency (FEMA).
No Downpayment for Disaster Victims
FHA underwriting guidelines section 203(h) allows FHA to insure Mortgages made by qualified victims who have lost their housing, or whose housing was damaged and are in the process of rebuilding or buying another house.
100% FHA Financing
- The Borrower is not required to make the Minimum Required Investment (MRI).
- The maximum Loan-to-Value (LTV) ratio limit is 100 percent of the Adjusted Value.
- If a 203(k) is used in conjunction with a 203(h), the 203(k) LTV applies.
If eligible, FHA‘s minimum 3.5% down payment requirement will be waived. If purchasing a new house, the house need not be located in the area where the previous house was located.
Whether you previously owned your home, or if you the home you were renting was destroyed in the fire, you may still be eligible.
As long as you meet the following minimum criteria, this special disaster relief loan may be an option for you:
- Application Deadline – The FHA case number must be assigned within 1 (one) year of the date the PDMDA is declared (November 12th, 2018), unless an additional period of eligibility is provided.
- Principal Residence – You may only buy a Primary Residence using the 203(h) loan. Investment homes are not eligible for FHA financing.
- Credit Score – You must have a minimum credit score of 580.
- Property Eligibility – The previous residence (owned or rented) must have been located in a PDMDA and destroyed or damaged to such an extent that reconstruction or replacement is necessary.
- Property Type -The purchased or reconstructed Property must be a Single Family Property or a unit in an FHA-approved Condominium Project.
Mortgage Insurance Premiums (MIP) follow standard requirements based on case number assignment dates.
FHA Maximum Mortgage Amounts allowed for the County where you are buying the new home.
After a natural disaster, many families are displaced completely, and much of your personal documentation may have been lost in the fires.
Lenders are required to make every effort to obtain traditional documentation regarding employment, assets, and credit, and must document their attempts.
Where traditional documentation is unavailable, your lender may use alternative documentation as outlined below.
- Credit for borrowers with derogatory credit – The lender may consider your credit a satisfactory credit risk if the credit report indicates that your credit was acceptable prior to the disaster, and any derogatory credit subsequent to the date of the disaster is related to the effects of the disaster.
- Income – If prior employment cannot be verified because records were destroyed by the disaster, and you are 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 lender may also include short-term employment obtained following the disaster in the calculation of Effective Income.
- Liabilities – When you are purchasing a new house, the lender may exclude the Mortgage Payment on the destroyed residence located in a PDMDA from your liabilities. To exclude the mortgage payments from the liabilities, the lender must obtain information that you are working with the servicing lender to appropriately address their mortgage obligation, and apply any property insurance proceeds to the Mortgage of the damaged house.
- Assets – If traditional asset documentation is not available, the lender may use statements downloaded from your financial institution website to confirm that you have sufficient assets to close the Mortgage.
- Housing Payment History – Your lender may disregard any late payments on a previous obligation on a Property that was destroyed or damaged in the disaster where the late payments were a result of the disaster and you were not three or more months delinquent on your Mortgage at the time of the disaster.
- Extenuating Circumstances – Your lender may justify approval if you were three or more months delinquent if extenuating circumstances are documented by the lender.
The lender must document and verify that the Borrower’s previous residence was in the disaster area, and was destroyed or damaged to such an extent that reconstruction or replacement is necessary.
Documentation attesting to the damage of the previous house must accompany the mortgage application.
Using a 203(k) Rehab Mortgage with 203(h) Disaster Relief Mortgage
Damaged residences located in a PDMDA are eligible for Section 203(k) mortgage insurance regardless of the age of the Property.
The residence only needs to have been completed and ready for occupancy for eligibility under Section 203(k). All other Section 203(k) policy must be followed.
Closing Cost Assistance
Even though there is no down payment required, there will still be closing costs associated with the third party services (title and escrow), prepaid costs like property taxes and homeowner’s insurance, and recording and transfer fees to the City / County.
These closing costs can be paid in several ways that do not include you bringing in money out of your own pocket.
- Closing Costs can be paid by a Gift from a relative.
- Closing Costs can be paid by Lender Credit (requires slightly higher interest rate).
- Closing Costs can be paid by Real Estate Agent Credit (keeps interest rates lower).
- Closing Costs, or Discount Points to reduce the interest rate can be paid by the seller of the home.
Finding a Lender that Can Help
Thankfully, natural disasters of this magnitude are few and far between. The down side to this is the fact that lenders do not normally have the ability to extend the above flexibilities and alternative documentation considerations when underwriting a loan file, and therefore may be unaware, or inexperienced with these guidelines.
There are many lenders that have embraced the FHA 203(h) and there are many experienced and professional loan officers that are willing to learn something new, and work with their underwriters to make sure that they are aware that they have flexibility when underwriting your loan under these circumstances.
As always, beware of scams out there asking for upfront money. There is nothing about qualifying for a disaster relief mortgage that requires up front money.
If you’re reading this, hopefully your family is ok, and I hope that learning about the FHA 203(h) puts a silver lining on an incredibly difficult time.
If you have questions about this program in California, please feel free to email me directly at Scott@BuyWiseMortgage.com, or call my team at (714) 907-4023.
If you are not ready to talk to someone, you can ask a question, or leave comment below and we’ll try to get you pointed in the right direction and guide you down the road to recovery.