Foreclosure & Government Guaranteed Loans – What You Need to Know
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For those who have difficulty obtaining a traditional mortgage, there are various options available to help secure a loan. Generally, these options help those who are unable to make a large down payment or have a lower-than-desired credit score.
The additional backing takes out some of the risk involved when lending to those who are less financially secure. While these services provide assistance obtaining a mortgage and occasional support after, they generally do not provide protection from foreclosure once a mortgage is in default.
(Disclaimer: This article is not intended to provide medical or legal advice and is only for informational purposes. If you think you have asbestos in your home, it is best to consult a professional.)
Are there any differences for Veterans Affairs (VA) loans facing foreclosure?
A VA loan is a mortgage loan that has been guaranteed by the Department of Veterans Affairs. While a VA-backed loan can provide several cost saving benefits to qualifying home buyers, it offers no additional protection from foreclosure. When a veteran defaults on a VA-backed mortgage loan, the foreclosure process is the same right up through the actual foreclosure.
The only difference is that once a VA-guaranteed mortgage loan is foreclosed by its lender, the VA pays the loan off and takes possession of the foreclosed home. They will then sell the home to recoup as much of the balance as possible, but any deficiency will remain your responsibility.
Importantly, because the VA is a government agency, it does not need permission from the court to start collecting on an unpaid mortgage debt, and has the right to collect the debt even in states where laws limit a lender's ability to seek a deficiency judgment.
If there is a remaining balance on your loan, the VA will notify you by mail and include information on applying for a waiver of this amount. Based on a VA statue, no debt will be collected from a veteran “where the Secretary determines that collection of such indebtedness would be against equity and good conscience.” Essentially, a waiver is available to anyone not judged to be engaged in fraud, misrepresentation, or bad faith.
Are there any differences for FHA loans facing foreclosure?
The Federal Housing Administration (FHA) is a division of the the Department of Housing and Urban Development (HUD). It’s main role today is to provide banks and other lenders with mortgage insurance. FHA home loans are mortgage loans that are provided to the public with the backing of FHA mortgage insurance.
While having FHA insurance cannot prevent foreclosure, it does provide some additional help if you find yourself in default. One benefit is access to FHA housing counselors who can help you navigate the process of avoiding foreclosure.
The FHA Pre-Foreclosure Sale (PFS) program – also commonly referred to as a short sale – exists to aid homeowners with FHA-insured mortgages in default. The PFS gives homeowners some additional time to sell their home before the foreclosure is complete. Homeowners approved for this program are given four months to market and sell their homes, and can then use the net proceeds to satisfy the mortgage debt. Under the program, your mortgage debt is satisfied even if the net proceeds are less than the loan balance owed.
If you are not able to sell your house in the appointed time, the foreclosure will continue. The FHA will repay the outstanding balance on your mortgage, HUD will take possession of your home, and it will be put up for auction.
Are there any differences for USDA loans facing foreclosure?
The US Department of Agriculture offers a zero down payment loan for eligible rural and suburban home buyers, allowing those who may otherwise not qualify for a loan to become homeowners. The USDA offers both loan guarantees and direct mortgage loans. Their guarantees are similar to FHA and VA loans, and allow you to secure low mortgage interest rates, even without a down payment. Direct mortgage loans are available low-income buyers.
Much like other loan guarantee programs, if your home faces foreclosure under a USDA backed mortgage, there is some additional support available in the form of mortgage counselors and advisors.
If you are unable to prevent foreclosure, your lender will submit a claim to the USDA for the balance owed. Much like VA loans and FHA loans, the USDA will reimburse the lender. They will then sell the home to recoup as much of the balance as possible, and any deficiency will remain your responsibility.
Just like VA loans, the USDA does not need permission from the court to start collecting on an unpaid mortgage debt, and has the right to collect the debt even in states where laws limit a lender's ability to seek a deficiency judgment.
Unlike the VA, the USDA does not offer a waiver of this debt. In order to collect your debt, the USDA has a number of tools at its disposal that are not available to private mortgage companies. For example, it can seize your tax refunds and government benefits, such as Social Security.
Learn Your Options
If you're a Texan facing foreclosure, you'll find more detailed information about the process and your options to stop foreclosure here.