The Impacts of Home Modifications Prior to Foreclosure on FHA Backed Loans
Now that America is coming out of the Pandemic, many people are expecting to see a huge rise in home foreclosures. Government moratoriums have been lifted and foreclosures can now proceed. Many homeowners have not been able to afford their house payments.
However, prior to any foreclosure, lenders or servicers whichever it may be, with borrowers with FHA (Federal Housing Authority) loans, have to ensure the proper protocols are followed. Under the National Housing Act, lenders have to offer borrowers loss mitigation options. These rules only apply to FHA-backed loans. You need to check if the loan is FHA-backed. A borrower needs to ensure what type of loan they have.
Prior to foreclosure, lenders or servicers must review all loans for a possible alternative to foreclosure. The lender or servicer can only proceed with the foreclosure if it has met its entire servicing obligation, and the loan is at least three monthly installments past due.
There are several requirements under federal regulations. One of the requirements is loss mitigation. Loss mitigation includes, but is not limited, to the following:
- Repayment Plan: As it states, these plans are designed for the mortgage holder to make payments to become current on his or her mortgage. Usually, this includes making a person’s regular monthly mortgage payment with a partial monthly payment to catch up on the loan. These payments have to be approved by the mortgage holder. The issue with this form is simply the amount of the arrearage the borrower has. Does the debtor have the ability to make the mortgage note and the extra to catch up on the mortgage? These are usually good for people who lost their job during covid and regained it or started new employment afterward. Generally, if a person is a couple of years behind and is still making the same amount of money as he or she was making before, this plan probably will not work.
- Forbearance Plans: In these plans, the home purchaser does not make payments during the time of forbearance. Usually, this is generally a short period of time. The purchaser then has to make the mortgage current. At the end of the forbearance, the person has to be able to make the mortgage current. These are usually good for people who are without a job, have health issues, or short term financial issues. The borrower has to be ready to make the mortgage current at the end of the forbearance period.
- Capitalization: This method takes all the unpaid interest, fees, and escrow deficient and adds them to the principal balance. The mortgage will generally be re-amortized over the period of the loan. There is no adjustment to the interest rate, repayment term, or interest-bearing principal balance. The payments will go up for the borrower. Again, these are good for persons with a steady income that can now pay the note.
- Interest Rate Reductions: By changing the interest rate may allow the borrower to make the payment easier. In some cases, may allow a variable-rate loan to change to a fixed-rate loan.
- Term Extension: This allows for the remaining principal balance to be extended for the borrower. This essentially lowers the mortgage note but extends the time of payment. These are generally good for persons who had to take a lower-paying job and are having problems making the current payment.
- Principal Forbearance: This allows for the unpaid principal balance to be added to the end of the loan without the interest accruing. This principle becomes a balloon payment for the borrower. The borrower can then attempt to refinance the remaining unpaid balance.
- Forgiveness of Principal or Arrears: As it says, the mortgage holder forgives the unpaid principal or unpaid interest. This usually is used when the loan exceeds the value of the property. A mortgage holder may use this when they know the current value of the property is less than if the property is sold to a third party.
- Short Sale: This allows the borrower to sell the property for less than what is owed and will avoid a foreclosure on his or her credit report. This should only be done when the mortgage holder agrees to waive the deficiency for the property. The cancelation of the debt may be treated as taxable income to the borrower.
- Deeds In Lieu of Foreclosure: This is a voluntary transfer of property as an alternative to foreclosure. These should not be done unless the mortgage holder agrees to waive the deficiency for the property. This is not a very good option if the borrower has a large amount of equity in the property.
As seen above there are several options for homeowners to avoid foreclosure. This should be done prior to any foreclosure of a federal-backed loan. If you are in this situation, make sure you have reviewed your options with your lender or servicer.