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With their lenient standards for down payments and credit scores, Federal Housing Administration mortgages offer a lifeline to buyers trying to squeeze into an increasingly unaffordable housing market.
However, the coronavirus recession has hit FHA borrowers hard — and that has led lenders to tighten the availability of FHA loans. As of mid, a record By contrast, the delinquency rate for conventional loans stood at just 6. Most homeowners have escaped the brunt of the recession so far — that chunk of the population is more likely to hold white-collar jobs, and to have kept their paychecks as they shifted to working from home during the pandemic.
FHA borrowers, on the other hand, skew toward workers toiling in service industries that have been forced to close or to curtail offerings during the pandemic. This type of loan is often easier to qualify for than a conventional mortgage and anyone can apply.
But FHA loans have a maximum loan limit that varies depending on the average cost of housing in a given region. The premiums that borrowers pay contribute to the Mutual Mortgage Insurance Fund.
FHA draws from this fund to pay lenders' claims when borrowers default. Because FHA will likely lose money if you stop making your mortgage payments, the agency has established a process to help homeowners avoid foreclosure.
The servicer has to evaluate the borrower using a process called a "waterfall," which is a series of steps, to determine which, if any, of the options listed below are appropriate.
During the waterfall process, the servicer must evaluate the borrower for loss mitigation alternatives in a specific order, and once a borrower is deemed eligible for a particular option, the evaluation stops. The process involves a complex string of calculations to determine which option, if any, is most appropriate for the borrower. Waterfall options and priority.
Under the waterfall, the servicer evaluates whether a borrower is eligible for one of the following options generally in the following order :. Federal law provides time for the loss mitigation process before a foreclosure can start. Under federal law , most homeowners, including those with FHA loans, get days to try to work out an alternative to foreclosure before the foreclosure can begin.
But if you're not able to work out one of the options above or another loss mitigation option, the foreclosure will start. FHA loan foreclosures are generally the same as foreclosures of other types of loans.
The process is set by state law. So, you'll get whatever foreclosure notices your loan contract and state law requires. If you need help dealing with your loan servicer, want more information about different ways to avoid foreclosure, or are seeking information about how to fight a foreclosure, consider talking to a foreclosure attorney. If you can't afford a lawyer, a HUD-approved housing counselor is another useful resource of information. Eventually, your lender will try to sell your home at a public auction.
If it doesn't sell there, the lender will take possession of the home to sell it on the open market. Borrowers who are paying back an FHA-insured mortgage have an option to avoid foreclosure: a chance to sell their homes before their lenders take over ownership of them.
Under the FHA's pre-foreclosure sale program, homeowners have four months to sell their homes before their lenders start foreclosure proceedings. If owners sell their homes, they can use the proceeds to eliminate their mortgage debt.
This holds true even if these proceeds are less than the total mortgage amount that owners owe. If owners can't sell their homes during this period, the foreclosure process would resume. The FHA pre-foreclosure option is a better choice for homeowners than foreclosure. A foreclosure goes on the credit report and remains there for seven years. During this time, owners will struggle to qualify for another mortgage loan, a car loan, personal loan or new credit cards.
Foreclosures will also damage owners' credit scores. The fall from a foreclosure varies depending on several factors, but owners can expect their scores to fall by at least points if they suffer a foreclosure. Borrowers can also seek a mortgage loan modification if they want to avoid foreclosure.
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