Homeowners have defaulted on mortgages in record numbers since the housing market collapsed in 2007. Loose eligibility guidelines that allowed borrowers to finance homes they could not reasonably afford have been eliminated, but the effects of unscrupulous lending practices continue in 2012. Borrowers typically fall behind on housing payments because of financial hardship. Lenders can legally pursue borrowers who default on loans insured by the Federal Housing Administration (FHA), or help them resolve the default by other means.
Your lender on the FHA-insured loan contacts you in writing and may call you after your first missed payment, known as technical default. The bank, mortgage company or loan servicer responsible for collecting on the loan -- not the FHA -- contacts you. The lender encourages you to pay the delinquent amount, plus penalties, immediately. If you cannot pay due to financial hardship, the lender may ask you to provide information about your finances to determine whether you qualify for a loss mitigation program that resolves the default.
After at least three missed payments and contacting you to collect the past-due amount, the lender may initiate foreclosure proceedings. Foreclosure is the legal process by which a debt collector can deprive you of ownership rights and sell or repossess the home to recoup its losses. The lender generally sends you a default letter, and in many states, a Notice of Default is recorded, which makes it public record. The default letter means you are in the pre-foreclosure stage and must either pay what you owe in full by the deadline indicated on the letter, or find an alternative resolution with your lender.
If you do not pay the amount owed or come to a resolution to remedy the default, the lender can foreclose and force you to move out of the home. Lenders can foreclose judicially by means of a lawsuit requiring court approval of the foreclosure. They can also foreclose non-judicially, without court intervention. The state in which the home is located generally uses one type more than the other. For example, New York uses judicial foreclosure, whereas in California, foreclosure is predominantly a non-judicial process. When a lender forecloses on an FHA-insured loan, the FHA reimburses the lender a portion of its losses.
Avoiding foreclosure generally benefits the borrower and lender. Foreclosing on a home is expensive for lenders and increases their inventory of bad assets, which they must manage and maintain until they can sell them. It also displaces families and slows economic recovery, which depends greatly on housing market stability. Your lender and the FHA can help you avoid foreclosure by means of a partial claim, in which the FHA pays the past due amount on your behalf; a pre-foreclosure (short) sale in which you sell the home for less than what you owe; forbearance, in which you pay the defaulted amount later; or a refinance to a more affordable payment.
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