FHA-insured loans are issued to lower-income Americans to assist them in securing the financing necessary to purchase a home they would typically be unable to afford.

Rather than issuing loans directly, the FHA insures loans that are made by private lenders. The FHA works to lower many of the costs associated with mortgage payments and provides an incentive to lenders to issue loans to these borrowers, by providing insurance in the event that a borrower falls behind on payments.

FHA loans require less upfront cash to close on the loan. Moreover, the actual cost of the insurance is passed to the homeowner and more often than not, will be included as part of the monthly payment. After five years, or when the loan balance reaches 78% of the property value, the insurance costs lapse.

12 USC §1715(u) states in pertinent part that a borrower facing imminent default is defined as one that is current or less than thirty days past due on the mortgage and is experiencing a significant reduction in income or some other hardship that will prevent him or her from making the next required payment on the mortgage in the month that it is due. Borrowers facing imminent default can only take advantage of the HUD’s forbearance or FHA-HAMP options.

The National Housing Act further stipulates that upon the default or imminent default of an FHA-insured mortgage lenders must explore loss mitigation solutions. Given that the FHA offers a claim to the lender where the borrower has defaulted, lenders may be more likely to entertain and offer workouts to keep the borrower in their home.

Even though HUD requires lenders to explore the available workout options, lenders may still proceed with foreclosures provided the HUD requirements are satisfied. Failure to comply with the requirements of HUD can lead to lenders getting hit with treble damages (which is very challenging to obtain). Despite that possible penalty, HUD is very unlikely to issue any penalties so long as some plausible option was contemplated by the lender.

Having these measures in place does not wholly safeguard against foreclosure. Therefore, it is imperative that borrowers who have obtained FHA-issued insurance be aware of the options they have should they face financial difficulty.