Understanding The FHA (Federal Housing Administration) Foreclosure Process
Types Of Foreclosure
Mortgage contracts may include clauses that stipulate in what manner the property will be foreclosed in a case of default by the homeowner. State laws dictate the foreclosure process if the mortgage contract does not specify the type of foreclosure. There are three types of foreclosure:
(1) Judicial Foreclosure – requires a demand letter and 120 days before final notification of foreclosure.
(2) Power Of Sale Foreclosure – mortgage company conducts public auction for the property.
(3) Strict Foreclosure – mortgage company files lawsuit against homeowner for default. Property reverts to mortgage holder if homeowner unable to pay.
Introduction – FHA Loans
FHA loans are an alternative to commercial mortgage loans in that FHA insures that the lender or bank will not suffer a financial loss if the homeowner defaults on the loan. In order to offer this insurance to the lender, FHA has the homeowner pay an insurance fee which is part of the monthly mortgage payment.
When a homeowner falls behind and quits making mortgage payments a sequence of events is initiated which eventually leads up to either the lender taking possession of the property or the property being acquired by a new owner or investor.
Although each state has laws dictating how the foreclosure process will take place in that state, all foreclosures follow pretty much the same phases:
Phase One – Missed Payments
Most states require that the homeowner be a minimum of 90 days behind on mortgage payments before the lender can start the foreclosure process. The lender will normally request occupancy inspections during this phase to determine whether the homeowner is occupying the property. It is at this time the bank or lender will send a “Demand Letter” demanding payment. Once the demand letter is sent, depending on the state of residence, the homeowner has 30 days to make arrangements with the lender to pay on the mortgage or pay off the mortgage.
Phase Two – Pre-Foreclosure
- When mortgage payments are at least 90 days in arrears, the lender can record a public notice of default on the mortgage and mails the notice to the homeowner. Once the public notice has been recorded and the homeowner notified of the recording the Pre-Foreclosure Phase is in effect.
- The Pre-Foreclosure phase is a grace period of three calendar months that gives the homeowner the opportunity to “cure” the default by selling the property, paying the mortgage or making other arrangements with the lender.
Phase Three – Auction
If the default has not been cured during the three calendar month phase of Pre-Foreclosure, the lender or the lender’s representative records, at the County Court House, a date of sale at a Trustee Sale auction. A notice of the auction is delivered to the homeowner, published in a local newspaper and, in some states, posted on the front door of the property.
Phase Four – Post-Foreclosure
If the property is not purchased by a new owner or investor at the Trustee Sale – the foreclosure auction – the lender takes ownership of the property. The property is now known as “Real Estate Owned”, REO.