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After surviving record-setting hurricanes and historic wildfires, many Americans face the daunting—and expensive—task of rebuilding their homes and replacing possessions. Insurance will cover much of the costs, but not the whole tab, and not for everyone.
Two out of three homes in the U.S. are underinsured (by 22% on average), and three out of five renters don’t have insurance that covers their belongings. Only 20% of homes with flood damage from Hurricane Harvey carried flood insurance.
Enter a somewhat surprising resource: the Small Business Administration. While the SBA’s main mission is to support small entrepreneurs, the agency also offers low-interest loans to makes it easier for affected homeowners and renters to recover when facing uninsured costs.
FEMA even urges those who are insured for disaster damage to apply for an SBA loan to provide bridge funding, essentially, until the check arrives from the insurance company. The SBA can lend an amount of as much as your total loss, even if you don’t yet know how much your insurer will pay. You must, however, agree to use the insurance proceeds you eventually receive to pay down your SBA loan.
In the last fiscal year, the SBA dispersed 24,121 home disaster loans, all backed by the U.S. Treasury, for a total of $ 1.3 billion, or just under $ 54,000 per loan. There’s no cap on how many loans the agency can provide in a year.
If you’re a victim of a recent disaster, this program may help. Here’s what you need to know about SBA loans.
Do you qualify?
To qualify for SBA disaster loans, homeowners and renters must live in an official disaster area, declared either by the president or by the agency itself. You can check if your county has been declared a disaster zone here. You can also get SBA loans by going through FEMA’s Individual Disaster Assistance, a program that helps disaster survivors with housing, medical and other immediate needs.
The SBA requires that you have a history of consistently paying your credit obligations. You can still be approved if there are isolated negative items on your credit report, so long as your other accounts are in good standing. If you don’t have a credit history, the SBA will consider payments on utilities, rent or insurance to establish your creditworthiness.
Ability to repay
The SBA considers your income—including Social Security, retirement and alimony or child support—and your outstanding debt payments (mortgage/rent, car loan, student loan and credit cards) to determine your eligibility and the size for a disaster loan.
If the loan exceeds $ 25,000, you will be required to put up collateral, typically in the form of real estate if available. If you have no collateral, the agency will require you to pledge what is available, rather than decline the loan.
How do the loans stack up?
Interest rates on disaster loans depend on whether you are eligible to receive a loan or other credit from a non-governmental source, such as a bank or mortgage lender, or if you have enough savings to cover the costs. If these options are available, you will get a 3.5% interest rate. If you don’t have any other loan options or funds of your own, the SBA disaster loan rate is set at 1.75%. Both rates for SBA loans are better than those offered on home equity lines of credit, which currently run between 4.5% and 5.5%, and unsecured personal loans, which start around 10%.
The interest rate on your disaster loan is fixed for the term of the loan, which can be as long as 30 years. There are no upfront fees for the loan and no early payment penalties.
The cap on loans to repair or replace your home is $ 200,000, while the limit for those to replace personal property is $ 40,000. SBA disaster loans are not available for vacation homes and don’t cover such expensive items as antiques, art collections, recreational vehicles or pleasure boats. But you can use an SBA home loan to finance a relocation.
If your home or property is located in a special flood hazard area, which are zones where mortgage lenders require flood insurance, the SBA imposes the same condition: You’re required to buy and maintain flood insurance for the total value of the property for the life of the loan.
You have 60 days from the date the area was declared a disaster to apply for an SBA disaster loan.
What’s the process?
The application process for SBA disaster loans is relatively easy. First, you fill out and submit a Home Loan Application (Form 5c) and the IRS Form 4506-T. The loan underwriter may later request paystubs or other information to verify the details of your application. An inspector also will visit your home to inspect and estimate your total losses. That will be used to determine how much of your losses are not covered by insurance. The approval process takes between two to four weeks.
This content originally appeared on ValuePenguin.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.