FHA Protections

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.

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 all these conditions 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-insured mortgage in default.