"FHA 203(h) After a Declared Disaster: Can You Buy a Replacement Home With No Down Payment?"

Section 203(h) is the FHA program for people whose home was destroyed in a federally declared disaster, and it does not require the minimum investment FHA asks for on an ordinary purchase. It covers buying a replacement home or rebuilding, it counts a home you rented as well as one you owned, and the FHA case number has to be assigned within one year of the declaration.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996 and licensed in fifteen states, NMLS #483943, through C2 Financial Corporation. The adjuster does not handle mortgages and the contractor does not either, so by the time somebody starts looking at homes again the clock has usually been running for months. The one-year deadline runs on the FHA case number, and your closing can land after it.

What is an FHA 203(h) loan?

Section 203(h) of the National Housing Act lets FHA insure a mortgage for someone who was a victim of a Presidentially-Declared Major Disaster Area, for the purchase or the reconstruction of a single family home. That is the whole authority, and FHA writes the details out in its own handbook: Handbook 4000.1, section II.A.8.b, "Disasters and 203(h) Mortgage Insurance for Disaster Victims," revised September 14, 2015 (HUD Handbook 4000.1).

A Presidentially-Declared Major Disaster Area is a specific legal designation rather than a description of how bad the storm was. The President declares it, and FEMA publishes the counties and cities each declaration covers, along with the date it was declared (FEMA disaster declarations). Your county is either inside a declaration or it is not, and that is what a lender checks first.

Underneath the special rules, this is an ordinary FHA loan. The handbook says a 203(h) mortgage is processed and underwritten under the rules that apply to the regular 203(b) program, and that where the two conflict, the 203(h) guidance controls. Everything you already know about how an FHA loan works and what the mortgage insurance costs still applies here. The rules that Section 203(h) changes are what the rest of this article covers.

Who does Section 203(h) cover, and does renting count?

Renting counts. The handbook's test is about the previous residence, and its words there are "owned or rented," so both of those count the same. That residence had to be located in the declared area, and it had to be damaged badly enough that reconstruction or replacement is necessary.

A renter whose building came down has no insurance settlement on the structure and no equity. Section 203(h) treats that person the same way it treats the homeowner next door.

Two other conditions come with it. The home you buy or rebuild has to be your principal residence, and it has to be a single family property or a unit in an FHA-approved condominium project.

FHA also states a minimum credit score of 500 for the program. Lenders set their own standards on top of FHA's, so the lender you call can require more than 500, and most of them do. It is worth asking that question early, because the answer tells you whether you are in the right place before anybody pulls anything.

How long do you have to use it?

The FHA case number must be assigned within one year of the date the disaster area is declared, unless an additional period of eligibility is provided.

A case number is a file number FHA issues at the lender's request, near the beginning of the process and long before closing. So the deadline you are working against is the day your lender asks for that number.

The year gets spent on the insurance settlement, then on the demolition, then on a decision about whether to come back to the same street at all. Any one of those can take months on its own. So if there is any chance you will buy or rebuild, you'll want to tell a lender early and let them get the case number assigned while you work through everything else.

The handbook leaves room for an additional period of eligibility, which is FHA's way of saying it can extend the window on a particular declaration. You are safer planning around the year, and treating an extension as something that either happened on your declaration or did not.

What does the program change about the down payment?

On a normal FHA purchase you bring a minimum required investment, which is FHA's term for the cash you have to put in yourself. Under Section 203(h) the handbook says you are not required to make it.

The handbook also sets the maximum loan-to-value at 100 percent of the adjusted value. Adjusted value is FHA's own defined term for the figure your loan gets measured against, and it comes out of the price and the appraisal, so your lender can tell you the number on your file.

Section 203(k) is the FHA renovation program, and it can be used together with 203(h). When it is, the 203(k) loan-to-value applies instead. The handbook also removes one of the usual 203(k) conditions for damaged homes inside a declared area. Those homes are eligible regardless of the age of the property, and the home only needs to have been completed and ready for occupancy at some point. If a renovation loan is where this ends up, how the appraisal works on a renovation mortgage is the piece that decides the numbers.

Closing costs are a separate question from the down payment, and they do not disappear. Seller credits, lender credits and gift funds all work the way they normally do on an FHA purchase.

What changes in underwriting after a disaster?

The instruction FHA gives lenders is that they "should be as flexible as prudent decision making permits," and then it names where. The lender still has to make every effort to get the usual documents and to show its work, and the alternatives below apply only where a document genuinely cannot be produced.

Credit. If your credit report shows satisfactory credit before the disaster, and the late payments or collections came after it and are related to its effects, the lender may treat you as a satisfactory credit risk anyway.

Income. If your prior employment cannot be verified because the records were destroyed, and you are in the same or a similar field, FHA accepts W-2s and tax returns from the IRS to confirm that employment and income. A short-term job you took after the disaster may also count toward the income the lender qualifies you on, which FHA calls effective income. That is unusual, because ordinarily a lender wants to see income that is going to continue.

Assets. Where the usual asset documents are gone, the lender may use statements downloaded from your bank's website to confirm you have enough to close.

The payment on the destroyed home. When you are buying a new home, the lender may leave the mortgage payment on the destroyed residence out of your liabilities. Two conditions come with it: the file has to show you are working with the servicer to address that mortgage, and any property insurance proceeds have to be applied to the mortgage on the damaged home. That exclusion is often the difference between the numbers working and not working, because otherwise you are carrying two housing payments in the calculation. How debt-to-income actually gets calculated is worth reading beside it.

Late payments on the old home. The lender may disregard late payments on the damaged home where the lateness came out of the disaster and you were not three or more months behind when it hit. If you were, approval is still possible where the lender documents the circumstances.

Can you rebuild instead of buying somewhere else?

Yes, and you can also buy somewhere the disaster never touched. The handbook is explicit that a home you are purchasing "need not be located in the area where the previous house was located." People move after a disaster and this program does not penalize it. If the move crosses a state line, what changes when you buy in a different state covers the parts that are genuinely different.

Reconstruction is in the authority itself, and refinancing is permitted when it is done in connection with rehabilitation.

The steps, in order

1. The declaration date is where the year starts. You can look your county up on FEMA's declarations list, and the date beside it is the day the one-year window opened.
2. The damage has to be documented, and that documentation goes in with the application. The lender has to document and verify that your previous residence was in the disaster area and was damaged badly enough that it has to be rebuilt or replaced. When you are ready, please provide whatever you have that shows it: your insurance adjuster's report, all pages, any correspondence from FEMA, any condemnation or red-tag notice the county issued, and dated photographs.
3. When you call a lender, it helps to say Section 203(h) by name. It is a program a loan officer may not have run before, and naming it up front saves a conversation.
4. The case number is the step with the deadline on it. The date it gets assigned has to fall inside the year from the declaration, while your closing date can fall outside it.
5. That lender's own credit standards are worth asking about up front. They come on top of FHA's, and they are the ones you will be held to.
6. You'll want to be on the record with the servicer on the destroyed home. The insurance proceeds need to be applied to that loan, and the file needs to show you have been working with them, because that is what the payment exclusion depends on.
7. After that it is the ordinary work. A pre-approval built from reviewed documents is worth more here than usual, because so much of this file is going to be built from substitutes for the documents that burned or washed away.

What goes wrong

Waiting for the insurance settlement before calling a lender. The claim and the case number run on separate tracks, and the claim can take as long as it takes without costing you this program.

Assuming a renter is not covered. The handbook says owned or rented, in those words.

Letting the old mortgage go quiet. Leaving that payment out of your debt-to-income calculation depends on the file showing you have been working with the servicer. If the lender cannot see that contact, the payment stays in and counts against you.

Shopping for the program at a lender that has never done one. You want somebody who will look up section II.A.8.b rather than tell you FHA needs the usual investment.

Treating a damaged replacement home as a normal purchase. If the home you are buying needs repairs itself, that becomes a conversation about the appraisal, and what a lender re-inspects and re-appraises after storm damage walks through how that gets handled. If the new home is in a mapped flood zone, how flood insurance lands in the monthly payment belongs in the math before you write the offer.

An illustration, so the timing is visible

Numbers and dates below are made up to show the mechanism.

A disaster area is declared on March 14. A family who rented a home there loses it. The insurance on their belongings settles in June, the landlord decides in August not to rebuild, and they spend the fall in an apartment two counties over while they think about whether to buy.

In January they call a lender. The declaration was ten months ago, so the case number is requested that week and assigned inside the window. They find a home in March, eleven days after the one-year mark, and they close in April. The closing is outside the year and that is fine, because the case number was not.

Suppose instead that they call in April, thirteen months after the declaration. Unless an additional period of eligibility was provided for that declaration, Section 203(h) is no longer available to them, even though the home and their circumstances are the same as they were in January.

Where to start

You can price a purchase for your own scenario without a credit pull and without giving me your name, then take that to whoever you are working with. Choose the option that works best for you.

Common questions

What is an FHA 203(h) loan?

It is a mortgage insured by FHA under Section 203(h) of the National Housing Act, for someone whose home was in a Presidentially-Declared Major Disaster Area and was damaged badly enough that it has to be rebuilt or replaced. FHA Handbook 4000.1, section II.A.8.b, holds the rules. It buys a replacement home or funds reconstruction, and that home has to become the principal residence.

Do you need a down payment for an FHA 203(h) loan?

FHA does not require the minimum required investment on this program. That is the main way Section 203(h) differs from an ordinary FHA purchase, where a minimum investment of your own money is part of the file. The handbook sets the maximum loan-to-value at 100 percent of the adjusted value, which is FHA's own term for the figure the loan is measured against. Closing costs are separate and still have to come from somewhere, whether that is your funds, a seller credit, a lender credit or a gift.

How long after a disaster can you apply for a 203(h) loan?

The FHA case number has to be assigned within one year of the date the disaster area was declared, unless an additional period of eligibility is provided for that declaration. The deadline is on the case number rather than on the closing, so a loan whose case number was assigned inside the year can close after it. FEMA publishes the declaration date for each disaster, and that date is what the year is measured from.

Can renters use FHA 203(h)?

Yes. FHA's handbook says the previous residence may have been "owned or rented," so a renter whose home was destroyed in a declared disaster area is covered on the same terms as an owner. That renter still has to document that the home was in the declared area and was damaged badly enough that reconstruction or replacement is necessary.

Does the replacement home have to be in the disaster area?

No. FHA's handbook states that if you are purchasing a new house, the house need not be located in the area where the previous house was located. The requirement attaches to the previous residence, which had to be in the declared area, rather than to the new one. That is what makes the program workable for people who decide not to return to the same neighborhood or the same state.