Low-cost disaster loans protect homes -- and wallets
By Michael D. Larson • Bankrate.com

Editor's note: Project Impact ended in 2001 and is no longer a source for loans. Bankrate.com has information on other ways you can get a loan to protect your home against natural disasters.

An ounce of prevention may be worth a pound of cure. But $10,000 from a government-backed loan program might just save your life.

Fannie Mae and Federal Emergency Management Agency officials have teamed up to make that kind of money available to borrowers through FEMA's Project Impact initiative. As a result, homeowners in many states can upgrade and retrofit their houses to withstand the wrath of hurricanes, tornadoes, earthquakes and other natural disasters -- all at a reasonable cost.

"There are two things that really make Project Impact successful," says Barry Scanlon, who was FEMA's director of corporate affairs when the program launched. "One is to make sure people are aware and make the education as easy as possible for them, as simple as possible. In addition to that, we want to give them some manner of a financial incentive or motivation for why they should do this.

"There are a lot of good reasons why people should be doing prevention."

Many homes threatened
Homeowners don't know how or when she'll strike, but Mother Nature seems to enjoy wreaking havoc on them 12 months out of the year. Floods and earthquakes hit regardless of the date. Tornadoes march across the Midwest in the spring. Hurricanes and tropical storms pound coastlines from Texas to Massachusetts between June and November.

While mortgage lenders require people to get homeowners insurance so they can rebuild after a disaster, they don't say anything about making properties damage-resistant in the first place. That makes many people complacent, even with memories of Hurricane Andrew in 1992. Homeowners who do want to make improvements can run into trouble, too. Because they'll usually need home equity loans to finance the work, they're at the mercy of contractors who may not be qualified to do the work and banks that may charge an arm and a leg for it anyway.

Against this backdrop, officials started brainstorming in 1998 about ways to offer a more attractive financing option. Some suggested taking a loan program designed to help people make their homes more energy efficient and modifying it to promote disaster preparedness. After further discussion, Fannie Mae and FEMA ran with the idea and introduced the Project Impact Prevention Loan for Florida residents.

"FEMA came to us to look at what kind of loan program could be used to fund this kind of work," says Dave Carey, Fannie Mae's director of marketing. "They're looking to get out in front of these storms, really, and have people make improvements before damage occurs."

Plan being phased in
Currently, only residents of the Sunshine State, California, Georgia, Oklahoma and Kansas can get financing through the new program. The agencies plan to roll it out in other regions over time.

Officials eventually hope homeowners all around the country will be able to use the program for everything from building tornado-resistant safe rooms to reinforcing gabled roofs against hurricane-force winds.

In the meantime, here's how a typical loan might work:

A homeowner would hear about it from media reports, a flyer at a store such as Home Depot or an insert included with his insurance statement. The borrower would then contact Fannie Mae or FEMA, who have reviewed and certified various contractors in the area, to get a list of professionals who can do the work.

Next, the customer would sit down with that contractor and go over what needed to be done and how much it would cost. Once that was completed, an application would be submitted by the contractor and a rate and payment schedule would be set based upon the borrower's credit history. After the contractor finished the work, the homeowner would have to review and sign off on it. Only after that happened would the professional be paid and the payment notices start showing up at the borrower's house.

Backstage, two specialty lenders, Crown Bank of Casselberry, Fla., and First Financial Funding Group of Mission Viejo, Calif., would fund the loan and sell it off to the agency in the same way a regular lender sells conventional first mortgages into the secondary market.

"The good thing about it is the money stays with the special purpose lender and it goes straight to the contractor once the homeowner says they're satisfied with the work," says Scanlon of FEMA. "You don't have any of the problems of the loans where people don't end up doing the work."

Favorable rates
Interest rates range are generally lower than what other unsecured personal loans offer. To find out the latest rates offered in your area as well as the average rate nationally, check the Bankrate.com's personal loan rate table. People can choose to make fixed payments for up to 10 years with Project Impact loans and borrow up to $20,000.

Unlike home equity products, borrowers won't enjoy a tax deduction on the interest they pay. But they also won't have to get a property appraisal, pay closing costs or face annual fees like they might with a home equity line of credit.

"The idea would be to make it as simple as possible for the contractor ... and as simple as possible for the homeowner," Carey says.

"We wanted to work with FEMA because we feel they certainly have a good idea that if people can improve or fortify their home so that it's not damaged in the first place, they're already ahead of the game."