Borrowers having trouble making payments on their FHA mortgages are encouraged to contact the FHA and the lender as quickly as possible to discuss possible arrangements to help prevent the loan from going into default and foreclosure.
In some cases a loan forbearance may be possible or a refinancing of the FHA loan, but in more extreme cases the borrower may consider a move called deed-in-lieu of foreclosure, sometimes called deed-in-lieu for short.
A deed-in-lieu arrangement is for borrowers in default on their FHA loans who don’t qualify for any other HUD loss mitigation program. In essence, deed-in-lieu results in the borrower signing back the home to the mortgage company. FHA rules state that deed-in-lieu proceedings must be initiated within six months of the loan going into default, and there are circumstances where “a current mortgagor is eligible for the deed-in-lieu of foreclosure option” according to HUD guidelines.
FHA rules state there are certain requirements the borrower is required to meet in order to be eligible. Among the first items listed in the FHA’s information sheet on deed-in-lieu actions is that the borrower may be charged up to $2,000 as compensation to the lender.
FHA rules state the home in question must be owner-occupied unless there is documentation to prove loan default was related to the need to vacate the property. That need can include job loss, divorce or other circumstances. The borrower and lender must agree to terms in writing as to the condition of the property and the terms of the deed-in-lieu. Investment properties are not eligible for a deed-in-lieu agreement.
Once of the most important rules is connected to “walk aways”, or people who simply abandon the property and payments on the FHA loan. FHA requirements state that “under no circumstances” may a lender encourage the borrower to purposely go into default in order to take advantage of a deed-in-lieu of foreclosure option on an FHA home loan.
Borrowers looking into the deed-in-lieu of foreclosure option on their FHA mortgage loans are required to provide written explanation as to the circumstances and causes of loan default and may be asked to provide proof of income reduction or other hardship.