The US Department of Housing and Urban Development (HUD) has established requirements that lenders must meet in order to bring a legitimate foreclosure action against homeowners. These rules apply to mortgages that are insured by the Federal Housing Administration (FHA) and include a number of steps lenders and servicing companies must follow before foreclosing on a property.
When lenders do not follow the FHA preforeclosure guidelines, the borrowers may be able to have the entire foreclosure declared invalid and thrown out of court until the requirements are met. In fact, the case does not even have to go to trial for it to be thrown out, as the homeowners have the ability to file a Motion to Dismiss the foreclosure due to the lender failing to meet a condition precedent.
For homeowners who have a loan insured by the FHA, this means that their servicing company must follow extra rules in order to foreclose on the house. If the requirements are not met, the foreclosure can not go forward. The most important aspect for borrowers to keep in mind, however, is that they must bring this defense before a judge, or else the court will just assume the lender has met all the requirements.
There are five main elements to this type of defense against foreclosure. The first, and most important, is that the loan must be insured by the Department of Housing and Urban Development. If the loan is conventional, hard money, or otherwise not insured by HUD, then the FHA preforeclosure requirements are not applicable to the situation and other defenses to foreclosure must be relied upon instead.
The second element is that the loan must be in default. This creates the responsibility of the lender or servicing company to comply with the preforeclosure requirements. The regulations do not define default or impose a statute of limitations, so the terms of the original loan documents should be checked out for actual definitions of default. Most often in a foreclosure case, default is falling behind on the monthly payments.
Third, lenders must mail a special notice to homeowners by the end of the second month of delinquency. This must be done before any foreclosure proceedings can be initiated. The notice is called How to Avoid Foreclosure. If this is not sent to the borrowers or is not sent in accordance with the regulations, the foreclosure case may be dismissed by the court.
Before three monthly payments are due and unpaid, the lender must make a reasonable effort to hold a face-to-face meeting with the borrowers. This must be done to determine if there is any way to work out a solution to foreclosure. There are a number of exemptions to this requirement, as well, which are listed here:
- The property is not occupied by the borrower.
- The lender and servicer do not have an office or branch within 200 miles of the property.
- The borrower has stated an intention not to work with the lender.
- Payments are caught back up through a repayment plan.
- The reasonable effort to make contact is unsuccessful.
The final requirement is that the lender must wait until at least three monthly payments are due and unpaid in order to begin the foreclosure process. Many servicing companies and banks wait this long anyway in order to attempt to put together a loan modification, refinance, or short sale with the borrowers, but this time period is mandatory for FHA insured loans. If the lender begins foreclosure earlier, it may be invalid.
With more mortgages being insured by the FHA through various federal foreclosure help programs, homeowners should be more aware of how the foreclosure process works for these types of loans. In addition to imposing more requirements on lenders, it also complicates the entire process by adding a layer of federal law on top of the state foreclosure laws and the terms of original mortgage contract itself.
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