Practical Guidelines on What You Can Do to Avoid Foreclosure on your FHA Loan.
I have structured this article in a “question and answer” format in an attempt to address the most common questions I receive at my office from people who are behind on their mortgage payments and simply have no idea on what to do about it.
The guidance below is applicable to homeowners with FHA Insured loans. While a good deal of this information may apply to all homeowners in danger of losing their homes, not all of the foreclosure avoidance tools mentioned may be available to you if you have a VA or conventional loan. Additionally, HUD/FHA does not have any Loss Mitigation oversight over VA or conventional loans. Please contact your lender or a housing counseling agency.
Q: What Happens When I Miss My Mortgage Payments?
When you miss 1 to 3 payments you are delinquent and reported to the credit bureaus as such. This hurts your credit but it still is easily repairable. After that, you become known as “in default” and this is when foreclosure proceeding start. Every state has different foreclosure laws and timeframes so you would need to check that out first. If a Foreclosure occurs, it legally means that your lender repossess (take over) your home. When this happens, you must move out of your house.
If your property is worth less than the total amount you owe on your mortgage loan, a deficiency judgment could be pursued. If that happens, you not only lose your home, you also would owe HUD an additional amount.
Both foreclosures and deficiency judgments could seriously affect your ability to qualify for credit in the future. So you should avoid foreclosure if possible.
Q: What Should I Do?
1. DO NOT IGNORE THE LETTERS FROM YOUR LENDER. If you are having problems making your payments, call your lender's Loss Mitigation Department without delay. Explain your situation. Be prepared to provide them with financial information, such as your monthly income and expenses. Without this information, they may not be able to help.
2. Stay in your home for now. You may not qualify for assistance if you abandon your property.
3. Contact a HUD-approved counseling agency (800) 569-4287 or TDD (800) 877-8339 for the housing counseling agency nearest you, or contact a mortgage mediation firm.
4. Save every dollar! If you hire a mortgage mediation firm or negotiate a plan with your lender on your own, you will almost always require some kind of upfront consideration to seal the deal, so please save every penny. This also demonstrates to the lender that you CAN afford your home.
Q: What workout programs are available, if I qualify?
On FHA loans, you may be considered for the following programs based on qualification:
Special Forbearance. Your lender may be able to arrange a repayment plan based on your financial situation and may even provide for a temporary reduction or suspension of your payments. You may qualify for this if you have recently experienced a reduction in income or an increase in living expenses. You must furnish information to your lender to show that you would be able to meet the requirements of the new payment plan.
Mortgage Modification. You may be able to refinance the debt and/or extend the term of your mortgage loan. This may help you catch up by reducing the monthly payments to a more affordable level. You may qualify if you have recovered from a financial problem and can afford the new payment amount.
Partial Claim. Your lender may be able to work with you to obtain a one-time payment from the FHA-Insurance fund to bring your mortgage current.
You may qualify if:
1. your loan is at least 4 months delinquent but no more than 12 months delinquent;
2. you are able to begin making full mortgage payments.
When your lender files a Partial Claim, the U.S. Department of Housing and Urban Development will pay your lender the amount necessary to bring your mortgage current. You must execute a Promissory Note, and a Lien will be placed on your property until the Promissory Note is paid in full. The Promissory Note is interest-free and is due when you pay off the first mortgage or when you sell the property.
Pre-foreclosure sale. This will allow you to avoid foreclosure by selling your property for an amount less than the amount necessary to pay off your mortgage loan. You may qualify if: 1. the loan is at least 2 months delinquent; 2. you are able to sell your house within 3 to 5 months; and 3. a new appraisal (that your lender will obtain) shows that the value of your home meets HUD program guidelines.
Deed-in-lieu of foreclosure. As a last resort, you may be able to voluntarily "give back" your property to the lender. This won't save your house, but it is not as damaging to your credit rating as a foreclosure.
You may qualify if:
1. you are in default and don't qualify for any of the other options;
2. your attempts at selling the house before foreclosure were unsuccessful; and
3. you don't have another FHA mortgage in default.
Q: How Do I Know if I Qualify for Any of These Alternatives?
Your lender will determine if you qualify for any of the alternatives. Your job is to get them the documentation they require to make a sound decision. As I said earlier, specific criteria applies to qualification. Many times this is where having an experienced negotiator on your team is worth its weight in gold because he or she can produce an entirely different outcome from what you may get.
Q: Should I Be Aware of Anything Else?
Yes. Beware of scams! Solutions that sound too simple or too good to be true usually are. If you're selling your home without professional guidance, beware of buyers who try to rush you through the process. Unfortunately, there are people who may try to take advantage of your financial difficulty. Be especially alert to the following:
Equity skimming. In this type of scam, a "buyer" approaches you, offering to get you out of financial trouble by promising to pay off your mortgage or give you a sum of money when the property is sold. The "buyer" may suggest that you move out quickly and deed the property to him or her. The "buyer" then collects rent for a time, does not make any mortgage payments, and allows the lender to foreclose. Remember, signing over your deed to someone else does not necessarily relieve you of your obligation on your loan.
Predatory Lenders. Once you are in default on your mortgage you will be buried in advertisements and calls from mortgage brokers and lenders saying they can refinance you quick and easy and solve all your foreclosure problems. In most cases this isn’t true at all. The point to consider here is this: If you can’t afford your payment now how on earth are you going to afford a new, larger payment? And if they do re-finance you, it will likely come with paying a large sum of money in various fees along with a very high interest rate.
A lot of folks also opt for the adjustable rate loan because it allows for them to get the financing. The problem is once the rates go up they very quickly get in over their head with the substantially higher payment and it isn’t long before they can’t pay it at all. I see this happen everyday!
Q: Are There Any Precautions I Can Take?
Here are several precautions that should help you avoid being "taken" by a scam artist:
1. Don't sign any papers you don't fully understand.
2. Make sure you get all "promises" in writing.
3. Beware of any contract of sale of loan assumption where you are not formally released from liability for your mortgage debt.
4. Check with a lawyer or your mortgage company before entering into any deal involving your home. READ THE FINE PRINT ON A LOAN CONTRACT!
5. If you're selling the house yourself to avoid foreclosure, check to see if there are any complaints against the prospective buyer. You can contact your state's Attorney General, the State Real Estate Commission, or the local District Attorney's Consumer Fraud Unit for this type of information.
Q: What Are the Main Points I Should Remember?
1. Don't sit and do nothing. Take action Today. If you are scared or unsure, then call a mortgage mediation firm like the kind I operate. The important thing to remember is every day you delay you are being charged for it by your lender in penalty fees. I’ve seen folks owe more in penalties than they did on the actual loan, so this is a real issue!
2. Call or write your mortgage lender immediately and be honest about your financial situation.
3. Stay in your home to make sure you qualify for assistance.
4. Explore every alternative to keep your home.
5. Beware of scams. If you gut instinct tells you this isn’t right, then don’t do it!
6. Do not sign anything you don't understand. And remember that signing over the deed to someone else does not necessarily relieve you of your loan obligation.
7. Save every dollar you can to use if needed for a workout plan with your lender.
8. Look at every possible way to reduce your monthly bills so you can increase your cash flow (surplus after paying all bills).
Act now. Delaying can't help. If you do nothing, YOU WILL LOSE YOUR HOME and your good credit rating
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