FHA Loans and Foreclosure
FHA, the common acronym for the Federal Housing
Administration, is a government agency that insures home loans made by lenders
throughout the country. If a borrower defaults on a loan, FHA reimburses
the lender for losses on the loan. As a result, FHA has an established loss mitigation policy that instructs lenders
on how to handle FHA borrowers that are behind in his or her mortgage payments
and face the threat of foreclosure.
FHA outlines five possible options for a home owner facing
foreclosure. Three of these options, referred to by FHA as
"reinstatement options", are available to borrowers that face temporary
causes for the default. Reinstatement options include special
forbearance where the lender arranges a special repayment plan, loan modification where the mortgage is refinanced or the term is extended to
accommodate a lower payment, and filing a partial claim (an interest free
loan from HUD to bring the mortgage current). The other two, referred to
as "disposition options", are designed to assist a borrower in the
transition to lower cost housing. Disposition options include a pre-foreclosure
sale and deed-in-lieu of foreclosure (voluntarily giving the property
back to the lender).
Though FHA does not have a litmus test to determine if a
delinquent borrower's situation qualifies for a particular option, FHA relies on
the lender to determine a borrower's eligibility. These eligibility
requirements include the type of hardship, the status of the property, and an
evaluation of the borrower's financial situation.
A lender will examine the underlying cause of the default
and determine if the financial problem is a temporary or permanent
situation. Borrowers that face a permanent financial crisis through death,
divorce, or permanent disability and are unlikely to be able to support the
monthly mortgage payment will only have disposition options available.
Borrowers that are facing a temporary set back but who will be able to continue
making the monthly mortgage payments in the future should qualify for
reinstatement options.
The FHA loss mitigation policy requires that the borrower
must occupy the property as a primary residence in order to be eligible for any
reinstatement options. Furthermore, the borrower must not own any other
real estate that has a FHA loan against it or had a FHA loan that incurred a
loss as a result of a foreclosure or sale of the property. If a property
has been abandoned, the borrower is not eligible for any reinstatement
options. In most cases of abandonment, foreclosure proceedings are
initiated instantly.
Critical to determining a borrower's eligibility is the
lender's analysis of the borrower's financial situation. A borrower will
be expected to provide detailed financial information to the lender and the
lender will be required to independently verify the information. In
addition, any borrower who has filed bankruptcy is not eligible for any options
except a partial claim.
If the cause of the borrower's default or delinquency is
one that poses a temporary setback and if the borrower will have the ability to
continue making the regularly scheduled mortgage payment, FHA prefers that the
lender considers reinstatement options in the following order: 1) special
forbearance, 2) loan modification, and 3) partial claim. If the loan is
not curable and/or the borrower is not willing to remain in the home, the lender
is to consider disposition options with a preference towards a pre-foreclosure
sale and then a deed-in-lieu of foreclosure.
Special Forbearance
Most lenders will focus on a special forbearance option for
borrowers eligible for reinstatement options. According to FHA's loss
mitigation policy, "A special forbearance is a written repayment agreement
between a lender and a mortgagor [borrower] which contains a plan to reinstate a
loan that has been delinquent for at least 90 days." Generally a
lender will work out a special repayment plan for a borrower through lower
payments over a period of time in order to compensate for the unexpected loss of
income or increase in living expenses.
In order for a borrower to qualify for a special
forbearance, a borrower must meet the following guidelines:
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at no time may the mortgage be behind more than the
equivalent of the total of 12 months of mortgage payments (to include
principal, interest, taxes and insurance).
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the special forbearance must lead to the reinstatement
or resumption of the loan by either gradually increasing the monthly payment
in order to cover the money owed or the resumption of normal monthly
payments. Furthermore, the loan must be more than 3 months behind but
no more than 12 months late.
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the borrower must be an owner occupant and continue to
occupy the property as a primary residence during the term of the
forbearance.
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a borrower must show that he or she will have
sufficient income to reinstate the loan. This may be accomplished
through the gradual repayment of the amount owed or through a combination of
a partial claim (see below).
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the property must be habitable with no adverse
conditions that would prevent the borrower's continued use or the property's
marketability.
Loan Modification
A loan modification is a permanent change to the mortgage
note that restructures the terms of the loan in order to reinstate the loan and
results in a payment the borrower can afford to make. Examples of a loan
modification would include lowering the interest rate, extending the due date on
the loan, or re-amortizing the remaining balance of the loan. This option
is used for home owners that have suffered a loss of income and do not have the
means to continue to make the normal monthly mortgage payments or back payments
but do have the means to support a lower payment.
In order to modify the mortgage, the borrower must:
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be three or more months behind in payments
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have had the mortgage for at least 12 months
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not be in foreclosure
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prove a loss of income or increase in living expenses
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live in the property as an owner occupant and continue
to live in the home as a primary residence
Furthermore, the loan modification must result in a fixed
rate loan that reinstates the loan. At the lender's discretion, the
interest rate may be set below market or increase the rate if the borrower has
the ability to support the payment. The lender is also allowed to include
any or all of the back payments owed into the principal amount. Any
foreclosure costs, late fees, and other administrative expenses may not be
included into the modified loan.
Partial Claim
A partial claim is a no interest loan from the government
that covers the amount necessary to reinstate a delinquent loan. The
borrower does not have to make payments for this note nor does the note become
payable until the borrower either pays off the FHA loan or no longer owns the
property.
In order to qualify for a partial claim, a borrower must:
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be at least 4 months behind but no more than 12 months
delinquent
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not be in foreclosure
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have overcome the cause of the default
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have sufficient income to resume the monthly mortgage
payments
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not have sufficient income to repay the amount
necessary to reinstate the loan
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occupy the property as an owner occupant and continue
to live in the home as a primary residence
The partial claim must fully reinstate the loan for the
borrower. The partial claim may only include the principal, interest,
taxes and insurance necessary to reinstate the loan. This does not include
any late fees or other administrative costs associated with the
delinquency. Though the partial claim is due when the FHA loan is paid off
or when the borrower no longer owns the home, the partial claim does not carry a
prepayment penalty.
Pre-foreclosure Sale
A pre-foreclosure sale allows a borrower in default to sell
the property, pay off the remaining balance of the loan, and collect any
remaining equity while avoiding foreclosure. This option is generally used
for borrowers who face a financial crisis that requires the sale of the
home. Borrowers whose property value has declined to less than the amount
owed against the home are eligible for this option.
To qualify for this option, the borrower must make a
commitment to actively market their home (with the use of a qualified real
estate agent) for a maximum period of 4 to 6 months. During this time
frame, the lender must delay any foreclosure action. The loan must
be at least 30 days behind in payments and the borrower must be an owner
occupant.
The lender is required to obtain a recent FHA appraisal and
preliminary title report for the home. The property must not have suffered
any severe damage and any repair costs must not exceed 10% of the "as
is" value of the home. Furthermore, the home must have a marketable
title to the home without any clouds or liens against the home that would
prevent the sale of the home.
Should the borrower owe more than the value of the home,
the lender may allow the buyer to sell the home for approximately 90% of the
appraised value of the home, assuming that the appraised value is at least 63%
of the amount owed. All sales contracts must be approved by the
lender. Failure to sell the home within 90 days of the expiration of the
pre-foreclosure sale time frame, the lender will commence foreclosure
proceedings or obtain a deed-in-lieu of foreclosure from the home owner.
Deed-In-Lieu of Foreclosure
A deed-in-lieu of foreclosure is a voluntary return of the
property from the borrower by deeding the home to FHA in exchange for a release
from all obligations under the mortgage. A borrower facing eminent
foreclosure against the home may voluntarily surrender the home to FHA in order
to prevent the foreclosure. Generally this is the preferred option to
foreclosure because it avoids the time and expense of a legal foreclosure.
To qualify for this option, the loan must be in default,
the borrower must face a situation where he or she continue to support the
mortgage payments, and the borrower must occupy the home as a primary
residence. Furthermore, the home owner must not own any other
properties subject to FHA financing.
It is advisable for a home owner facing this option to
first consider the pre-foreclosure sale. By deeding the property over to
the lender, the borrower loses all accrued equity in the home.
Furthermore, the deed-in-lieu of foreclosure does not release the borrower from
any second mortgages or junior liens against the home. The home owner may
face additional issues from the other lenders involved. Finally, the
borrower may be subject to income tax consequences as a result of the
deed-in-lieu action.
However, should a home owner decide to select this option,
he or she must complete the deed-in-lieu action within 6 months of the date of
default unless an extension was granted by first trying other loss mitigation
options or approval from the lender.
Timelines
In order to qualify for one or several of the options
listed above, the borrower must exercise his or her option(s) within the first
six months of the default. Exceptions to this rule apply if:
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the loan is reinstated
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the borrower agrees to a special forbearance
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the loan is modified
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the loan is reinstated by a partial claim
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the borrower sells the property
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the borrower deeds the property back to FHA
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the lender initiates foreclosure
An additional 90 days may be allotted if the lender has
initiated but is unable to complete a special forbearance, loan modification or
partial claim within the first six months and no other intervening delays (such
as a bankruptcy) impede the process.
Negotiating With Your Lender
As a borrower prepares to speak with his or her lender,
there are several key areas to focus on before any interviews begin. As
stated before, FHA relies on
the lender to determine a borrower's eligibility to include the type of hardship, the status of the property, and an
evaluation of the borrower's financial situation. Successful negotiations
is determined by preparation and good communication.
When preparing for the interview, ask yourself the
following:
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Why did I default on the loan? Is it a result of
just not making the payment or have I suffered a verifiable loss of
income. Lenders will listen if you have had a verifiable and temporary
set back in income. The key is being able to support your reasons for
being late. If the reasons are due to temporary layoffs for example,
send the lender a letter from your employer stating that you have been laid
off. If you don't have a reason, you may limit your options.
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Can I cut back on my expenses anywhere? After
looking at your income, the lender will analyze your expenses. Do you
really need cable if you face the threat of losing your house?
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Can I sell an asset to compensate for the deficiency or
loss of income? Do you have any assets that you are forced to make
payments on? Would selling the asset decrease your monthly expenses
and/or generate sufficient cash to apply towards the loan? In some
cases a borrower may be able to sell a car, for example, to reduce the
monthly expenses by eliminating the car loan. Also, any profits from
the sale of the asset could be used to bring the loan current.
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Do I know anyone that could loan me the money to get
back on my feet? Do I have any family members, relatives, or other
sources that could loan me the money. Though most people are ashamed
to ask, asking a family member, friend or relative may be the only hope of
saving the family home.
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Is it worth the effort to save the home? Would it
be easier to sell and start over? In some cases a borrower may not be
able to handle the burden and stress of keeping the house.
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Should I file for bankruptcy? When facing a
financial crisis, a borrower will often look towards bankruptcy as an option
to alleviate the problems. Before making a decision, determine how
bankruptcy will affect your ability to keep the home.
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If I were the lender, would I justify the cause based
upon the borrower's situation? Though this is one of the most
difficult questions to ask, be realistic. If you loaned someone
$100,000 dollars, would you believe his or her excuse for being late?
If not, you might want to reconsider your excuses. Remember that
lenders prefer to hear about temporary setbacks versus permanent
situations.
The lender will do a detailed analysis of the borrower's
financial situation and scrutinize the reasons for the default A borrower
should compile the applicable paperwork including letters from employers showing a
decrease income, bills and receipts justifying an increase in expenses, and
prepare to answer the questions about the reasons for the default. Knowing
your situation allows you to talk effectively with your lender.
The second key to successful negotiations with a lender
lies in good communication. Good communication is achieved by quick
action, immediate responses, and positive cooperation. If a home owner
knows that he or she is going to be late, the borrower should call the
lender. Ignoring letters and phone calls from the lender actually
increases the likelihood that the home owner will lose the home.
Once the home owner has begun a dialogue with the lender,
it is important that the borrower responds to the lender's requests. The
home owner should create a diary of events and log every call, letter, and
meeting. He or she should include the date, time, who called, the
telephone number and extension of that individual, and detail what was
spoken. The home owner should keep copies of every letter sent to and
received by the lender. Furthermore, the borrower should emphasize his or
her desire to work out a solution to the default each and every time the lender
calls. If the cause for the default has been resolved or will be resolved,
the borrower should assure the lender that his or her problems are behind them
and he or she is trying to get back on their feet. The lender will
generally be more lenient and willing to work with a home owner if the problem(s)
are in the past.
Finally, the borrower should remember to keep a positive
attitude. Threats, belligerent dialogue, and an unwillingness to cooperate
does not prove to the lender that the borrower is serious about working out a
solution. In addition, a borrower shouldn't make promises that he or she
cannot keep. Though it may seem like an easy way to stall a foreclosure, a
borrower may end up with a higher payment, owe more money than originally
delinquent, destroy his or her credit, and may lose the house in the process.
Foreclosure is an expensive process for both the home owner
and the lender. However lenders realize that foreclosure is an effective
means to demand payment from a home owner. A borrower must be prepared and
ready to face the consequences of his or her situation. Knowing his or her
options and expectations of the lender are crucial to successfully avoiding
foreclosure.
However, there is free help and assistance for home owner
facing the possibility of foreclosure. If you would like to talk with
someone about your situation, click
here.
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