Your FHA Loan: Minimizing Credit Problems by Avoiding Foreclosure

by Karen Lawson
May 4th, 2010
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Homeowners with an FHA mortgage may have little home equity or negative equity due to the low down payment requirements for FHA loans. Before considering walking away from a mortgage that’s “upside down,” considering the impact of foreclosure and/or bankruptcy on your credit scores is essential.

Mortgage Loan Foreclosure and Bankruptcy: Bad News for Your Credit Scores

CNN Money estimates that a home foreclosure can decrease consumer credit scores by 85 to 160 points, while filing bankruptcy creates worse results by reducing credit scores by 130 to 240 points. This kind of “hit” to your credit score can make it nearly impossible to qualify for credit, and can also impact your ability to find a job or rent a home. Insurance companies may set premiums according to consumer credit scores, so home and auto coverage could cost more with a poor credit rating.

FHA Guidelines Support Mortgage Loan Foreclosure Prevention Programs

Although FHA does not directly provide mortgage loans, it reimburses FHA approved lenders for losses resulting from mortgage default and foreclosure. This motivates FHA to work with mortgage lenders and homeowners toward avoiding foreclosure. HUD, the parent agency of FHA, sponsors a network of approved foreclosure avoidance and housing counselors that can help homeowner get the help needed for preventing foreclosure.

FHA Works with Mortgage Lenders, Government Programs

FHA provides mortgage lenders with policies and procedures allowing multiple options for avoiding home foreclosure. FHA loans may also be eligible for government sponsored homeowner assistance programs including Home Affordable Modification Program (HAMP), and the Home Affordable Refinance Program (HARP). Homeowners who currently have FHA mortgage loans may qualify for refinancing through the FHA streamline refinance program. FHA lending requirements are more lenient than conventional mortgage lending guidelines, which can make it easier for borrowers with little home equity to refinance.

Ask for Foreclosure Help Before It’s Too Late

As soon as you realize you cannot make another mortgage payment, please contact your mortgage lender and ask for advice. Be frank and honest in describing your situation; being defensive or uncooperative will not help your situation. FHA guidelines require mortgage lenders to gather financial information and details about your situation; this helps lenders with identifying solutions appropriate to your situation and ability continue making mortgage payments. Have a pen and paper handy when you call your lender; making notes of instructions and required documentation can help with saving time and avoiding misunderstandings.

Foreclosing home loans is costly for HUD/FHA and mortgage lenders; the longer you wait before asking for help, the fewer foreclosure avoidance programs may be available. Contacting your lender quickly can minimize damage to your credit scores while helping you qualify for a greater range of assistance options.

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