What Happens When You Default on a FHA Mortgage?

An FHA mortgage is protected by the federal government.

The Federal Housing Administration (FHA) issues insurance against mortgage default. In other words, an FHA mortgage is protected by the federal government in the event that the homeowner cannot continue making payments on the mortgage. The FHA insurance does not cover the homeowner; however, should the homeowner default on the loan, the FHA insures the mortgage payment to the lender to prevent the lender from losing money.

Facts

FHA loans are insured for the lender but not for the borrower. When a homeowner takes out a loan, he or she is responsible for making the payments on that loan, regardless of whether or not the loan is FHA-insured. If the homeowner is forced to default on the loan, the FHA assumes responsibility for protecting the loan and thus the lender. Upon default, the lender may apply to the FHA for the loan funds.

Fees

FHA funding is traditionally generated from the fees that are embedded in the mortgage. A mortgage insurance premium is factored into an FHA loan, and the agency then utilizes this funding to protect mortgage companies in the case of a loan default. As defaults on FHA-insured loans increased through 2007 and 2008, however, the FHA began running low on the available funds and was forced to tap into federal taxpayer money.

Foreclosure

Should the homeowner default on his or her mortgage, the lender has the right to foreclose on the property, even if that mortgage is insured through the FHA. Because the FHA does not provide loans -- but instead insures them for lenders -- the homeowner has a responsibility to the lender to make the payments. Defaulting on payments for an FHA mortgage can lead to foreclosure just as defaulting on payments for a conventional mortgage can.

Considerations

Although the FHA loan does not protect the homeowner, the agency does offer a range of resources to assist homeowners who are struggling with financial loss. Homeowners can consult various FHA resources and even contact a housing counselor to assist them in considering their options. Even though an FHA mortgage does not ensure that the homeowner will be able to avoid foreclosure, the agency does attempt to help homeowners prevent this process as much as possible.

Expert Insight

The Federal Housing Administration encourages struggling homeowners to stay in contact with FHA-provided housing counselors and with the lender if the homeowners are in danger of defaulting on the loans. Foreclosure is not necessarily the only option; homeowners can request a loan adjustment or refinance if necessary. The FHA notes that the key is staying in contact with the agency and with the mortgage company and keeping the lines of communication open.

References

• Business Insider; FHA Mortgage Default Rate; Dina ElBoghdady and Dan Keating; February 2010
• Department of Housing and Urban Development: Avoiding Foreclosure