If you have a Federal Housing Administration (FHA) loan and you’re delinquent in mortgage payments—or you’re about to fall behind—you’re entitled to a particular “loss mitigation” process to help you avoid a foreclosure. ("Loss mitigation" is what the mortgage-servicing industry calls the process of working out a foreclosure alternative.) The U.S. Department of Housing and Urban Development (HUD) requires mortgage servicers to attempt to prevent foreclosures on FHA home loans using this process. In fact, servicers must be proactive in soliciting borrowers for loss mitigation and have to make affirmative efforts to cure a loan default.
But if you can’t work out a solution to your mortgage delinquency, the foreclosure will go forward under state law—no different than any other foreclosure.
FHA provides mortgage insurance to approved lenders, which offer FHA-backed (insured) mortgages to borrowers. Lenders can provide FHA loans to borrowers who otherwise might not qualify for a mortgage because the loans are less risky to the lender. (FHA will cover the losses if the borrower defaults.)
FHA loan terms. FHA lenders can offer borrowers good terms including a low down payment—as low as 3.5% of the purchase price. This type of loan is often easier to qualify for than a conventional mortgage and anyone can apply. Borrowers with a FICO credit score as low as around 500 might be eligible for an FHA loan. But FHA loans have a maximum loan limit that varies depending on the average cost of housing in a given region.
Borrowers must pay MIP. With an FHA loan, borrowers have to pay MIP (mortgage insurance premium) as part of the loan. (Conventional mortgages have PMI, while FHA loans have MIP.) The premiums that borrowers pay contribute to the Mutual Mortgage Insurance Fund. FHA draws from this fund to pay lenders' claims when borrowers default. (Learn about the difference between conventional, FHA, and VA loans.)
Because FHA will likely lose money if you stop making your mortgage payments, the agency has established a process to help homeowners avoid foreclosure.
Under HUD policy (the FHA is part of HUD), in most cases, the servicer must review a borrower who has an FHA-insured loan and is behind in payments—or about to fall behind—for loss mitigation options. The servicer has to evaluate the borrower using a process called a "waterfall" to determine which, if any, of the options listed below are appropriate.
Under the waterfall, a borrower might—depending on the circumstances—qualify for an option like a:
Under federal law, most homeowners—including those with FHA loans—get 120 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 no different than foreclosures of other types of loans. The foreclosure process is set by state law. So, you’ll get whatever foreclosure notices your loan contract and state law requires. (Get an overview of your state’s foreclosure procedures in our State Foreclosure Laws area.)
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.