Real Estate Professionals

Buyers Rely on Their Real Estate Agents for Advice
Are "Exotic Mortgages" in Your Buyer's Best Interest?
FHA Protections for Your Buyers

Buyers Rely on Their Real Estate Agents for Advice - (Top)

The FHA understands that real estate professionals sometimes make mortgage recommendations to clients unfamiliar with the home buying process. An FHA-insured mortgage loan is a viable option for many buyers and we hope you will help educate the buyer. A mortgage product tailored to the buyer's need works for all concerned because:

• The homeowner can afford the payments
• The homeowner is happy and satisfied
• A happy homeowner refers friends and family to the real estate agent

Are "Exotic Mortgages" in Your Buyer's Best Interest? - (Top)

The exotic mortgage market is geared toward borrowers with less-than-perfect credit. Exotic loans carry higher, often excessive, rates and fees to offset the higher risk of default.

In most cases, an FHA-insured loan is a better product for clients with less-than-perfect credit. Many buyers entering into exotic loans could have qualified for FHA-insured loans.

Buyers with exotic loans may end up in foreclosure because of:

• Fluctuating interest rates
• Prepayment penalties that discourage refinancing
• Inability to make payments

FHA Protections - (Top)

The FHA protects buyers from the pitfalls of exotic mortgages.

Loss-mitigation is one of the major advantages of FHA-insured loans over exotic mortgages. These protections keep buyers from entering into loans that are not in their best interest. They also offer incentives to lenders to avoid foreclosure if unforeseen circumstances force a buyer into default.

• Partial claim: An FHA lender may be able to obtain a one-time payment from FHA's insurance fund to bring a mortgage current. A borrower may qualify if both these conditions are met:
  • The loan is at least 4 months but no more than 12 months delinquent
  • The borrower is able to begin making full mortgage payments

When a lender files a partial claim, HUD will pay the lender the amount necessary to bring a mortgage current. The borrower must execute a promissory note, and a lien will be placed on the property until the promissory note is paid in full. The promissory note is interest-free, and is due when the first mortgage is paid off, or when the property is sold.

• Pre-foreclosure sale: FHA allows a buyer to avoid foreclosure by selling the property for an amount less than the amount necessary to pay off the mortgage loan. A buyer may qualify if all these conditions are met:
  • The loan is at least 2 months delinquent
  • The house is sold within 3 to 5 months
  • A new appraisal (obtained by the lender) shows that the value of the home meets HUD program guidelines
• Deed-in-lieu of foreclosure: As a last resort, a buyer may be able to voluntarily "give back" the property to the lender. This won't save the house, but it will cause less damage than foreclosure to the borrower's credit rating. Buyers may qualify if the following all apply:
  • They are in default and don't qualify for any of the other options
  • Their attempts at selling the house before foreclosure were unsuccessful
  • They don't have another FHA mortgage in default

No one purchases a home thinking about default. If this unfortunate circumstance arises, your buyer will be better off with an FHA-insured mortgage than with an exotic mortgage.