Defaulting on a mortgage loan -- missing your monthly mortgage payments -- can prove costly. Your credit score will fall. You will collect hefty late fees. And, if you keep missing payments, you might lose your home to foreclosure. All this can happen on any mortgage, including those insured by the Federal Housing Administration, better known as FHA loans. But in the case of an FHA loan, you'll gain a last-ditch chance to avoid the credit damage caused by foreclosure.
Whether you're paying down a conventional mortgage loan or one insured by the FHA, you're technically in default once you miss a monthly mortgage payment due date. Most lenders, though, will give you a grace period that typically lasts 15 days. If you make your payment during this time, you'll suffer no credit damage or late fees. If you don't make your payment by the time this grace period ends, though, you'll start racking up late fees. These vary by lenders. If you don't make your payment by 60 to 90 days after it is due, you'll likely receive a notice of default by your lender. This accelerates the foreclosure process.
Notice of Default
Most lenders will give you a set period of time after you receive your notice of default to make your missed payments and late fees. If you miss this deadline, your lender will begin foreclosure proceedings. 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 sell their home for $180,000 and they owe $190,000 on their home loan, they can use the proceeds to pay off their debt, even though they fall $10,000 short. If owners can't sell their homes during this period, the foreclosure process would resume.
The Better Option
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 100 points if they suffer a foreclosure.
Borrowers can also seek a mortgage loan modification if they want to avoid foreclosure. In a modification, lenders reduce the size of the mortgage payments of struggling homeowners. They can do this by reducing the interest rate attached to a loan, reworking a loan's terms or reducing its principal balance. To encourage lenders to modify more mortgage loans, the federal government runs its Home Affordable Modification Program, which provides financial incentives to lenders that modify the loans of homeowners facing financial struggles. Borrowers who want to explore a modification need to contact their current mortgage lenders to ask for this assistance.
- U.S. Department of Housing and Urban Development: Pre-Foreclosure Sale Frequently Asked Questions
- Mortgage News Daily: From Mortgage Default to Right of Redemption
- Making Home Affordable: Home Affordable Modification Program
- LegalMatch. "Foreclosure Alternatives." Accessed June 20, 2020.
- Cornell Law School Legal Information Institute. "Foreclosure." Accessed June 20, 2020.
- NOLO. "Homeowners’ Associations (HOAs & COAs)." Accessed June 20, 2020.
- Consumer Financial Protection Bureau. "How Does Foreclosure Work?" Accessed June 21, 2020.
- U.S. Department of Housing and Urban Development. "Are you at risk of foreclosure and losing your home?" Accessed June 21, 2020.
- Cornell Law School Legal Information Institute. "Equity of Redemption." Accessed June 21, 2020.
- FindLaw. "Regaining Ownership After Foreclosure: Statutory Redemption." Accessed June 21, 2020.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.