What happens to my FHA loan in a natural disaster? If you have already closed on your FHA mortgage, you’ll need to get in touch with your lender to determine what next steps are, but what about those who were in the process of purchasing property but did not close the loan before the disaster struck?
FHA loan rules anticipate this problem and have specific instructions to the lender for handling what to do if a borrower’s purchase winds up in a federally declared disaster area.
According to the FHA loan handbook, HUD 4000.1, “All Properties with pending Mortgages or endorsements in Presidentially-Declared Major Disaster Areas (PDMDA) must have a damage inspection report that identifies and quantifies any dwelling damage. The damage inspection report must be completed by an FHA Roster Appraiser even if the inspection shows no damage to the Property, and the report must be dated after the Incident Period (as defined by FEMA).”
Borrowers who were not purchasing, but applying for Streamline Refinance loans, will find different rules applying to them:
“Streamline Refinances are allowed to proceed to closing and/or endorsement without any additional requirements” according to page 351 of HUD 4000.1, which also instructs the lender that the original appraiser should be used where possible to complete the damage inspection.
“However, if the original Appraiser is not available, another FHA Roster Appraiser in good standing with geographic competence in the affected market may be used. If the Mortgagee uses a different Appraiser to inspect the Property, the Appraiser performing the damage inspection must be provided with a complete copy of the original appraisal.”
HUD 4000.1 adds that damage repair in such cases much be performed, “by licensed contractors or per local jurisdictional requirements. All damages, regardless of amount, must be repaired and the Property restored to pre-loss condition with appropriate and applicable documentation.”
In situations where there is no damage, or the damage is valued at below $5,000, FHA loan rules permit the lender to close the loan.
“Complete repairs and close Mortgage or establish repair escrow and close Mortgage.” But for situations where the damage is in excess of $5,000 or the home is no longer habitable, HUD 4000.1 instructs the lender, “Do not close Mortgage. Repairs must be complete prior to closing.”
These procedures are for loans that were endorsed by the lender prior to the natural disaster, but not yet closed. In another blog post, we’ll examine the procedures lenders must follow for loans that were closed, but not endorsed before the disaster struck.